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India Equity Research Reports, IPO and Stock News
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Risks seep into FY13
India’s capex cycle is facing multiple headwinds which will adversely
impact loan and fee growth. We expect banking sector’s credit growth to
moderate to 16% over FY12-13. A fall in share of capex-linked loans will
hit fees harder which will impact private banks more. Asset quality faces
headwinds from slower growth and we forecast a three-fold rise in Gross
NPAs by FY14. However, trends will be divergent and banks with higher
exposure to risky segments and restructured loans (mostly PSUs) will see
higher NPLs. We lower FY12-13 sector estimates by 3%-9%; ICICI and
HDFC Bank remain our top picks and we remain U-WT on most PSU
Banks. We also cut recommendation on Yes Bank to O-PF.
Slower investment cycle will affect loan growth and fee growth
India’s slower economic growth, near policy paralysis and gaps in execution of
infrastructure projects will adversely affect banking sector’s credit growth.
We therefore believe that the growth in India’s bank credit is likely to slow
from 21% in FY11 to ~16% in FY12 & FY13.
However, we do not see a major collapse in loan growth as a large share of
loans is towards working capital, which will grow in line with nominal GDP.
Additionally, banks may also benefit from market share gains in foreign
currency lending to Indian corporates as global banks are turning risk averse
and are focussing on capital conservation.
Margins are likely to be stable as banks are focussed on profitability which was
evident in 2Q results whereby most banks saw QoQ improvement in margins.
While credit growth may still be healthy, fall in share of longer-term / project
loans will affect banks’ fee growth (these are fee intensive products); this will
be a bigger risk for earnings of SBI, Axis and ICICI Bank.
Delinquencies will rise and PSU banks are more vulnerable
Asset quality will face pressures from (1) slowdown in economic growth, (2)
high interest rates and (3) Sector-specific concerns, especially for SMEs.
We however expect asset quality pressures to be manageable as a) corporate
leverage is low, (2) capacity utilisation is healthy, (3) loan growth multiplier
has averaged 1x in past two years v/s 1.7x over FY07-08
We are building in three-fold rise in absolute gross NPL (Gross NPA ratio to rise
from 2.4% in Mar-11 to 4.6% by Mar-14); loan loss provisioning estimated to
grow at a cagr of 34% over FY11-13 (from 80bps in FY11 to 110bps in FY13)
However like 2Q, where private banks reported a 30% drop in loan loss charge
and PSU banks reported a 42% increase (fig 19), we expect asset quality
trends to continue to be divergent.
Asset quality pressures will be higher for banks with (1) lenient underwriting
standards, (2) higher exposure to risky sectors- SME, power, real estate,
textiles etc and (3) higher share of restructured loans.
Lowering earnings and target prices; prefer quality over value
We lower sector earning estimates for banks by 3% for FY12 and 9% for FY13
on the back of a cut in loan growth and fee growth as well as higher loan loss
provisioning; we have also lowered our target prices.
Our sensitivity analysis indicates (1) 10bps higher LLP will impact FY13
earnings by 2-7% and (2) 1% higher gross NPLs will impact FY13 adjusted
BVPS by 7-39%; banks with higher leverage and low ROA are more vulnerable.
We prefer banks with well capitalised balance sheet, stronger liability franchise
and higher ROA with ICICI Bank and HDFC Bank being our top picks.
We remain underweight on SBI and most other PSU Banks; BOB is our only
positive recommendation in the PSU space.
Downgrade Yes bank to O-PF as upside to price target is 11%.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Risks seep into FY13
India’s capex cycle is facing multiple headwinds which will adversely
impact loan and fee growth. We expect banking sector’s credit growth to
moderate to 16% over FY12-13. A fall in share of capex-linked loans will
hit fees harder which will impact private banks more. Asset quality faces
headwinds from slower growth and we forecast a three-fold rise in Gross
NPAs by FY14. However, trends will be divergent and banks with higher
exposure to risky segments and restructured loans (mostly PSUs) will see
higher NPLs. We lower FY12-13 sector estimates by 3%-9%; ICICI and
HDFC Bank remain our top picks and we remain U-WT on most PSU
Banks. We also cut recommendation on Yes Bank to O-PF.
Slower investment cycle will affect loan growth and fee growth
India’s slower economic growth, near policy paralysis and gaps in execution of
infrastructure projects will adversely affect banking sector’s credit growth.
We therefore believe that the growth in India’s bank credit is likely to slow
from 21% in FY11 to ~16% in FY12 & FY13.
However, we do not see a major collapse in loan growth as a large share of
loans is towards working capital, which will grow in line with nominal GDP.
Additionally, banks may also benefit from market share gains in foreign
currency lending to Indian corporates as global banks are turning risk averse
and are focussing on capital conservation.
Margins are likely to be stable as banks are focussed on profitability which was
evident in 2Q results whereby most banks saw QoQ improvement in margins.
While credit growth may still be healthy, fall in share of longer-term / project
loans will affect banks’ fee growth (these are fee intensive products); this will
be a bigger risk for earnings of SBI, Axis and ICICI Bank.
Delinquencies will rise and PSU banks are more vulnerable
Asset quality will face pressures from (1) slowdown in economic growth, (2)
high interest rates and (3) Sector-specific concerns, especially for SMEs.
We however expect asset quality pressures to be manageable as a) corporate
leverage is low, (2) capacity utilisation is healthy, (3) loan growth multiplier
has averaged 1x in past two years v/s 1.7x over FY07-08
We are building in three-fold rise in absolute gross NPL (Gross NPA ratio to rise
from 2.4% in Mar-11 to 4.6% by Mar-14); loan loss provisioning estimated to
grow at a cagr of 34% over FY11-13 (from 80bps in FY11 to 110bps in FY13)
However like 2Q, where private banks reported a 30% drop in loan loss charge
and PSU banks reported a 42% increase (fig 19), we expect asset quality
trends to continue to be divergent.
Asset quality pressures will be higher for banks with (1) lenient underwriting
standards, (2) higher exposure to risky sectors- SME, power, real estate,
textiles etc and (3) higher share of restructured loans.
Lowering earnings and target prices; prefer quality over value
We lower sector earning estimates for banks by 3% for FY12 and 9% for FY13
on the back of a cut in loan growth and fee growth as well as higher loan loss
provisioning; we have also lowered our target prices.
Our sensitivity analysis indicates (1) 10bps higher LLP will impact FY13
earnings by 2-7% and (2) 1% higher gross NPLs will impact FY13 adjusted
BVPS by 7-39%; banks with higher leverage and low ROA are more vulnerable.
We prefer banks with well capitalised balance sheet, stronger liability franchise
and higher ROA with ICICI Bank and HDFC Bank being our top picks.
We remain underweight on SBI and most other PSU Banks; BOB is our only
positive recommendation in the PSU space.
Downgrade Yes bank to O-PF as upside to price target is 11%.
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