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Financials (Rajeev Varma, Veekesh Gandhi)
Overweight
Key drivers of sector outlook
Loan growth to moderate to 15% by FY13. There is minimal fresh capex activity,
which could see its impact on FY13 growth. Moreover, infra lending most
impacted due to issues in the power sector. But retail is still likely to be ‘OK’.
A large part of the contraction of NIMs for the sector is behind us. In fact, banks
with large wholesale funding and corporate balance sheets will get some
support, as lending rates have risen and wholesale funding costs have stabilized
in the past three months.
We expect another (fourth one for India) credit cycle to be led by the SME
sector, arising from a sharply weakened global demand. Hence, over two years
(till FY13), slippages (new NPL formation) could rise by +80%. Restructured
loans could also double in the next three years, led by power and infra. We
believe power loan restructuring may happen faster in <12 months. Most banks/
experts est. 20% of loans for power projects to be restructured. We est. 40%.
Among the banks, we believe private banks may trade closer to their average
multiples of the past 5-7 year cycles as their overall risk profile is better, and earnings
growth too could be better hedged in the emerging environment. In contrast, many
govt. banks could trade at P/B multiples that are closer to -1 SD below average
given their relatively higher loan exposures and lower earnings growth.
Top stock pick: ICICI Bank
Volume growth of +18/16% for FY12/13, leading to market-share gains, as we
assume the sector loan growth at +17/15% for FY12/13. The recently expanded
distribution (+1,200 branches in the last 18 months) will provide some fillip to
CASA, NIMs, and fees going ahead.
ICICI Bank is likely to be the least impacted on the asset quality front, due to its
lower exposure to infrastructure and MSME. Moreover, retail loans account for
about 35-40% of loans and given the seasoned book, the risk of higher
slippages (retail) is unlikely.
Earnings growth of +23/24% could well sustain through FY12/13. ICICI Bank is
among the better placed banks with regards to earnings trajectory, driven by
normalizing of credit costs at c. 60bp vs. +2.4% in the last credit cycle (2009-10).
Balance sheet of international business de-risked / ALM largely matched. UK
subsidiary may see further balance-sheet contraction over the next year. ICICI
Bank will look to repatriate excess capital back from the Canadian subsidiary.
ICICI Bank’s recent stock correction has made valuations more attractive (1.0x
1yr Fwd P/BV). But rising ROAs (from <1.3% in FY11 to +1.6% by FY13) and
core ROE (+16% by FY12 vs. c.12% in FY11) coupled with the recently
expanded distribution, and comfort on capital should see a re-rating.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Financials (Rajeev Varma, Veekesh Gandhi)
Overweight
Key drivers of sector outlook
Loan growth to moderate to 15% by FY13. There is minimal fresh capex activity,
which could see its impact on FY13 growth. Moreover, infra lending most
impacted due to issues in the power sector. But retail is still likely to be ‘OK’.
A large part of the contraction of NIMs for the sector is behind us. In fact, banks
with large wholesale funding and corporate balance sheets will get some
support, as lending rates have risen and wholesale funding costs have stabilized
in the past three months.
We expect another (fourth one for India) credit cycle to be led by the SME
sector, arising from a sharply weakened global demand. Hence, over two years
(till FY13), slippages (new NPL formation) could rise by +80%. Restructured
loans could also double in the next three years, led by power and infra. We
believe power loan restructuring may happen faster in <12 months. Most banks/
experts est. 20% of loans for power projects to be restructured. We est. 40%.
Among the banks, we believe private banks may trade closer to their average
multiples of the past 5-7 year cycles as their overall risk profile is better, and earnings
growth too could be better hedged in the emerging environment. In contrast, many
govt. banks could trade at P/B multiples that are closer to -1 SD below average
given their relatively higher loan exposures and lower earnings growth.
Top stock pick: ICICI Bank
Volume growth of +18/16% for FY12/13, leading to market-share gains, as we
assume the sector loan growth at +17/15% for FY12/13. The recently expanded
distribution (+1,200 branches in the last 18 months) will provide some fillip to
CASA, NIMs, and fees going ahead.
ICICI Bank is likely to be the least impacted on the asset quality front, due to its
lower exposure to infrastructure and MSME. Moreover, retail loans account for
about 35-40% of loans and given the seasoned book, the risk of higher
slippages (retail) is unlikely.
Earnings growth of +23/24% could well sustain through FY12/13. ICICI Bank is
among the better placed banks with regards to earnings trajectory, driven by
normalizing of credit costs at c. 60bp vs. +2.4% in the last credit cycle (2009-10).
Balance sheet of international business de-risked / ALM largely matched. UK
subsidiary may see further balance-sheet contraction over the next year. ICICI
Bank will look to repatriate excess capital back from the Canadian subsidiary.
ICICI Bank’s recent stock correction has made valuations more attractive (1.0x
1yr Fwd P/BV). But rising ROAs (from <1.3% in FY11 to +1.6% by FY13) and
core ROE (+16% by FY12 vs. c.12% in FY11) coupled with the recently
expanded distribution, and comfort on capital should see a re-rating.
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