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India: Financial Services
Equity Research
Rising bond yields should lower FY12 earnings then reverse in FY13
Expect bond yields at 9-9.25% by Mar 2012, 8.25-8.5% by Mar 2013
We believe the deteriorating fiscal position and higher borrowings by the Central
government is a cause of market concern and has led to a 44bp increase in bond
yields in the last month and 34bp since the announcement of higher borrowings
by GoI (Sep 29). As per our India ECS team, the worsening policy mix and excess
supply of government securities could put further upward pressure on bond
yields, leading the 10-year yield to rise to 9-9.25%, close to historical highs. For
FY13, the ECS team believes that the bond yields will likely come off these highs
due to monetary easing, but remain high at 8.25-8.5%.
Ytd, banks placed excess funds in government securities
Rising deposit rates had the desired impact on deposit growth, which
accelerated to 18%. However, credit growth has moderated (lower capex, high
interest rates impacting growth) leading to lower 50% incremental CD (ytd) ratio
vs 76% last year. Banks have placed the excess liquidity, to the extent of 56% of
incremental deposits (ytd) into govt securities, with the yoy growth in govt
securities at 18%, or 28% of deposits and borrowings vs 26% as of March.
PSU banks should be impacted the most, private banks less
Within our coverage universe, banks with a higher proportion of available for
sale portfolio (AFS) are BOI and SBI based on June data. We estimate that at 9%
bond yield, 67bp higher than June yields, would impact FY12E PBT 3-5%.
However, banks will likely reverse most of these losses in FY13 as investment
yields fall and, in our estimate, add at least 3-8% to the PBT. Private banks will
likely be impacted less given lower AFS.
Attractive valuations, lower inflation in FY13 to drive performance
We recently turned more positive on the sector on the back of significant
valuation correction, our expectations of lower rates in FY13 (-100bp) and our
stress test analysis that shows the market is factoring in higher NPLs. While
higher rates could impact near-term earnings, a large part of this should reverse
in FY13; we maintain our constructive stance and recommend long-term
investors add to positions selectively. Reiterate Buy on: IndusInd Bank (on CL)
and Yes Bank – on strong earnings growth between FY11-FY14E as we believe
margin pressure should be offset by higher CASA ratio and lower wholesale
rates in FY13; ICICI Bank and Axis Bank on attractive valuations vs RoA and
growth on sustained margins; BoB and PNB on valuations vs RoE.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India: Financial Services
Equity Research
Rising bond yields should lower FY12 earnings then reverse in FY13
Expect bond yields at 9-9.25% by Mar 2012, 8.25-8.5% by Mar 2013
We believe the deteriorating fiscal position and higher borrowings by the Central
government is a cause of market concern and has led to a 44bp increase in bond
yields in the last month and 34bp since the announcement of higher borrowings
by GoI (Sep 29). As per our India ECS team, the worsening policy mix and excess
supply of government securities could put further upward pressure on bond
yields, leading the 10-year yield to rise to 9-9.25%, close to historical highs. For
FY13, the ECS team believes that the bond yields will likely come off these highs
due to monetary easing, but remain high at 8.25-8.5%.
Ytd, banks placed excess funds in government securities
Rising deposit rates had the desired impact on deposit growth, which
accelerated to 18%. However, credit growth has moderated (lower capex, high
interest rates impacting growth) leading to lower 50% incremental CD (ytd) ratio
vs 76% last year. Banks have placed the excess liquidity, to the extent of 56% of
incremental deposits (ytd) into govt securities, with the yoy growth in govt
securities at 18%, or 28% of deposits and borrowings vs 26% as of March.
PSU banks should be impacted the most, private banks less
Within our coverage universe, banks with a higher proportion of available for
sale portfolio (AFS) are BOI and SBI based on June data. We estimate that at 9%
bond yield, 67bp higher than June yields, would impact FY12E PBT 3-5%.
However, banks will likely reverse most of these losses in FY13 as investment
yields fall and, in our estimate, add at least 3-8% to the PBT. Private banks will
likely be impacted less given lower AFS.
Attractive valuations, lower inflation in FY13 to drive performance
We recently turned more positive on the sector on the back of significant
valuation correction, our expectations of lower rates in FY13 (-100bp) and our
stress test analysis that shows the market is factoring in higher NPLs. While
higher rates could impact near-term earnings, a large part of this should reverse
in FY13; we maintain our constructive stance and recommend long-term
investors add to positions selectively. Reiterate Buy on: IndusInd Bank (on CL)
and Yes Bank – on strong earnings growth between FY11-FY14E as we believe
margin pressure should be offset by higher CASA ratio and lower wholesale
rates in FY13; ICICI Bank and Axis Bank on attractive valuations vs RoA and
growth on sustained margins; BoB and PNB on valuations vs RoE.
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