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2Q will largely be lacklustre for banks, in our view. Asset quality and spike in slippages on
transition to system based NPL will be the key variables for PSBs. Private banks are relatively
safe on the asset quality front, except for some pain in the MFI portfolio. PFC will have to provide
for MTM loss on forex borrowings.
2QFY12 sector update
The ytd loan growth (April to 9 September 2011) was 3.4%, deposit growth was 6.0% and
investment growth was 13.8% (see Table 1). The three-month and 12-month corporate deposit
(CD) rates have cooled off a bit, but remain elevated at about 9% and 9.7%, respectively (see
Chart 1). Liquidity remained in deficit mode, but appears to be easing. The average repo balance
was Rs478bn in 1QFY12, which came down to about Rs428bn in 2QFY12 (see Chart 2). Yields
on government securities hardened a bit qoq during 2QFY12 (Table 3) and equity markets were
down about 13% qoq (Table 4). The marked-to-market (MTM) provision on the government
securities (G-Sec) portfolio is unlikely to be material, in our view. However, banks will likely have
to provide for diminution in value of their equity portfolios.
Asset quality key to PSBs, in our view
We believe the base rate hike across banks will drive loan yields higher, but this will be more or
less offset by the full impact of higher cost of funds and a lower loan-to-deposit ratio. Core fee
income growth will likely be moderate, in line with the relatively dry sanctions pipeline, in our view.
We expect the public sector banks (PSBs) to move to 100% system-based NPL recognition by 30
September 2011 (see Table 2 for status across banks under coverage as of June 2011). This
may result in a spike in slippages and, therefore, an interest reversal in this quarter could impact
the reported net interest margins (NIMs). Asset quality trends at State Bank of India (SBI) and
Punjab National Bank (PNB) need to be watched closely. SBI management is guiding for higher
slippages during 2QFY12.
Private banks and NBFCs
We expect largely stable to marginal improvement in NIMs for the private banks under our
coverage. Core fee income will moderate in line with the relatively dry sanctions pipeline. Pending
implementation of the corporate debt restructuring (CDR) package for the microfinance institution
(MFI) portfolio, the banks will likely have to classify a part of these loans as non performing as of
30 Sept. ’11. Asset quality should largely hold up otherwise for private banks in general. Power
Finance Corp (PFC), according to our back-of-the-envelope calculation, will likely have to provide
about Rs4.5-5bn liability translation loss (MTM) on its forex borrowings (see Tables 5 and 6). We
have factored this into our 2QFY12 estimates.
Key recommendations
We continue to be buyers of Axis Bank, SBI and PFC.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
2Q will largely be lacklustre for banks, in our view. Asset quality and spike in slippages on
transition to system based NPL will be the key variables for PSBs. Private banks are relatively
safe on the asset quality front, except for some pain in the MFI portfolio. PFC will have to provide
for MTM loss on forex borrowings.
2QFY12 sector update
The ytd loan growth (April to 9 September 2011) was 3.4%, deposit growth was 6.0% and
investment growth was 13.8% (see Table 1). The three-month and 12-month corporate deposit
(CD) rates have cooled off a bit, but remain elevated at about 9% and 9.7%, respectively (see
Chart 1). Liquidity remained in deficit mode, but appears to be easing. The average repo balance
was Rs478bn in 1QFY12, which came down to about Rs428bn in 2QFY12 (see Chart 2). Yields
on government securities hardened a bit qoq during 2QFY12 (Table 3) and equity markets were
down about 13% qoq (Table 4). The marked-to-market (MTM) provision on the government
securities (G-Sec) portfolio is unlikely to be material, in our view. However, banks will likely have
to provide for diminution in value of their equity portfolios.
Asset quality key to PSBs, in our view
We believe the base rate hike across banks will drive loan yields higher, but this will be more or
less offset by the full impact of higher cost of funds and a lower loan-to-deposit ratio. Core fee
income growth will likely be moderate, in line with the relatively dry sanctions pipeline, in our view.
We expect the public sector banks (PSBs) to move to 100% system-based NPL recognition by 30
September 2011 (see Table 2 for status across banks under coverage as of June 2011). This
may result in a spike in slippages and, therefore, an interest reversal in this quarter could impact
the reported net interest margins (NIMs). Asset quality trends at State Bank of India (SBI) and
Punjab National Bank (PNB) need to be watched closely. SBI management is guiding for higher
slippages during 2QFY12.
Private banks and NBFCs
We expect largely stable to marginal improvement in NIMs for the private banks under our
coverage. Core fee income will moderate in line with the relatively dry sanctions pipeline. Pending
implementation of the corporate debt restructuring (CDR) package for the microfinance institution
(MFI) portfolio, the banks will likely have to classify a part of these loans as non performing as of
30 Sept. ’11. Asset quality should largely hold up otherwise for private banks in general. Power
Finance Corp (PFC), according to our back-of-the-envelope calculation, will likely have to provide
about Rs4.5-5bn liability translation loss (MTM) on its forex borrowings (see Tables 5 and 6). We
have factored this into our 2QFY12 estimates.
Key recommendations
We continue to be buyers of Axis Bank, SBI and PFC.
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