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India: Financial Services
Equity Research
Attractive valuations on slower growth, NPL woes; initiate Fed, OBC
Credit growth to GDP growth likely to fall
We now expect lower credit growth of 14-15% in FY12E/FY13E as the ratio
of credit growth to GDP growth falls to 0.9-1.1X from 1.3X on average over
the past five years on macro slowdown, policy logjam, project delays and
high interest rates. However, we do not expect it to fall to historical lows of
0.6X, on likely: (1) rate and CRR cut (150bps/100bps) over Jan. 2012-March
2013, (2) loans to projects approved or in the pipeline, and (3) acceleration
of roads/other projects by government. Policy reform could provide
positive, and ongoing Eurozone shocks negative, surprise to our estimates.
Recovery not as strong as FY08-10, but not as weak as FY97-02
Despite our concerns over the macro environment, we do not expect a
repeat of FY97-02, a period when corporate India had higher capacity and
leverage and banks had lower CAR and high NPL ratios, of >15%. Nor is it
like the FY08-10 slowdown, which started from a stronger base in FY07,
when India’s fiscal deficit and banks’ NPLs were lower. Also, the sector’s
valuations are higher now than in the prior two cycles; therefore, we think
the next recovery may not be as strong as it was in FY08-10.
Lower margins, but likely higher MTM gains on investment book
Banks’ operating profit will likely come under pressure in FY13 on higher
NPL provisions and lower credit growth. Along with falling interest rates
this will put pressure on banks margins in the 1H of FY2013. However, we
expect margins to stabilize and then recover by the end of the year as
falling deposit rates reflect with a lag. We also expect MTM gains as banks
investment portfolios appreciate with falling interest yields.
Remain selective, prefer private banks over PSU banks
After major correction, bank stocks are trading below historical averages
on concerns of NPLs and slowdown in credit growth. We revise FY12-14E
earnings across our covered Indian financial stocks by -21% to 10% and our
Camelot-based target prices by -21% to +12%. However, we think most
concerns are priced in and we see limited downside risk. We prefer private
over PSU banks (on resilient earnings); Buy INBK (Conv. list), YESB, ICBK,
AXBK, BoB and PNB. We initiate on FEDB with Buy and OBC with Neutral.
We upgrade HDFC (wholesale borrower to benefit from rate fall) and HDBK
(marginal upside to target price) and lower UNBK (on sticky NPLs) to Sell.
company reports:
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India: Financial Services
Equity Research
Attractive valuations on slower growth, NPL woes; initiate Fed, OBC
Credit growth to GDP growth likely to fall
We now expect lower credit growth of 14-15% in FY12E/FY13E as the ratio
of credit growth to GDP growth falls to 0.9-1.1X from 1.3X on average over
the past five years on macro slowdown, policy logjam, project delays and
high interest rates. However, we do not expect it to fall to historical lows of
0.6X, on likely: (1) rate and CRR cut (150bps/100bps) over Jan. 2012-March
2013, (2) loans to projects approved or in the pipeline, and (3) acceleration
of roads/other projects by government. Policy reform could provide
positive, and ongoing Eurozone shocks negative, surprise to our estimates.
Recovery not as strong as FY08-10, but not as weak as FY97-02
Despite our concerns over the macro environment, we do not expect a
repeat of FY97-02, a period when corporate India had higher capacity and
leverage and banks had lower CAR and high NPL ratios, of >15%. Nor is it
like the FY08-10 slowdown, which started from a stronger base in FY07,
when India’s fiscal deficit and banks’ NPLs were lower. Also, the sector’s
valuations are higher now than in the prior two cycles; therefore, we think
the next recovery may not be as strong as it was in FY08-10.
Lower margins, but likely higher MTM gains on investment book
Banks’ operating profit will likely come under pressure in FY13 on higher
NPL provisions and lower credit growth. Along with falling interest rates
this will put pressure on banks margins in the 1H of FY2013. However, we
expect margins to stabilize and then recover by the end of the year as
falling deposit rates reflect with a lag. We also expect MTM gains as banks
investment portfolios appreciate with falling interest yields.
Remain selective, prefer private banks over PSU banks
After major correction, bank stocks are trading below historical averages
on concerns of NPLs and slowdown in credit growth. We revise FY12-14E
earnings across our covered Indian financial stocks by -21% to 10% and our
Camelot-based target prices by -21% to +12%. However, we think most
concerns are priced in and we see limited downside risk. We prefer private
over PSU banks (on resilient earnings); Buy INBK (Conv. list), YESB, ICBK,
AXBK, BoB and PNB. We initiate on FEDB with Buy and OBC with Neutral.
We upgrade HDFC (wholesale borrower to benefit from rate fall) and HDBK
(marginal upside to target price) and lower UNBK (on sticky NPLs) to Sell.
company reports:
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