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3QFY12 Results Preview
Ambit Capital Pvt Ltd
Banking
Even as lenders come to grips with an uncertain global macro-economic
environment, renewed economic slowdown in the domestic environment
poses key challenges to the banking system from an asset quality and
hence, a financial stability perspective. We expect this macro-economic
uncertainty to mainifest itself in sluggish systemic credit growth (at ~14%
during FY13E) with its consequent implications for asset quality and
earnings. Our base case factors in stressed assets (portfolio of nonperforming
+ restructured advances) accelerating to ~8% (from current
levels of ~5.5%) for banks within our coverage universe.
Preparing for upcoming results
Concomitant with muted credit growth (low volumes synonymous with a seasonally
sluggish quarter), we expect margins to trend lower this quarter for banks within
our coverage universe (ex-SBI). We build in weak fee income growth (YoY growth
at sub-15%) during the quarter in line with the muted loan book growth. While the
pre-provisioning profit is likely to grow at marginally below the pace of loan book
growth, we expect incremental provisioning as well as investment depreciation to
dilute earnings. We expect higher loan loss provisions (from restructured assets as
well as higher organic delinquencies) to exert further downward pressure on
earnings. We also expect weaker forex profits (due to sharp rupee depreciation)
and higher investment depreciation to drag earnings during the quarter. While we
carefully monitor sequential slippage trends across banks, we continue to prefer
Bank of Baroda (BoB) in anticipation of BoB sustaining its relatively low incremental
delinquencies.
Ambit v/s consensus
While our earnings estimates for the quarter versus consensus are about 8%-10%
below consensus, we are 3%-5% below consensus in our earnings expectations for
FY12E. The divergence is predominantly driven by weaker non-interest income
forecasts, our aggressive slippage assumptions and weaker recovery forecasts.
Recommendation
While we expect margins to trend lower for a large number of banks this quarter,
we believe that the system is yet to witness large-scale stress from an asset quality
perspective. We wish to highlight that asset quality is set to worsen for the system
as a whole (as reflected in our forecast revisions for state-owned banks), especially
from corporate credit as a result of the weaker economic growth environment that
is likely to prevail over the next 18 months. We continue to be BUYers in BoB
among the state-owned banks and we continue to like City Union Bank. We
continue to remain SELLers in State Bank of India (SBI) and Axis Bank.
Revision in forecasts for banks within our coverage universe
Why are we revising our estimates?
Given our outlook towards sluggish macro-economic growth in FY13E, a large part
of the revision in the forecasts for banks within our coverage universe is therefore
on account of muted credit growth that we anticipate during FY13E. We build in
systemic credit growth at sub-14% for banks within our coverage universe (down
from around 16%-17%), with consequent implications for fee income as we expect
growth in core fee income to stay muted.
Whilst we envisage a reversal in the interest rate cycle post 4QFY12 (post-March
2012), from a systemic rates perspective, we expect the pace of reduction in
interest rates to be disproportionate through the calendar year. We expect banks
to begin transmitting the benefits of reduced policy rates only beyond the first 25-
50bps (base rates are typically linked to the portfolio cost of funds as a key
variable as opposed to marginal cost of funds) and hence, there would be a lag in
the pace at which banks will transmit the benefits of lower policy rates. Purely from
a systemic perspective, we expect the flip side of base rates to begin affecting
banks during 2HCY12 implying a disproportionate pass-through beyond the initial
25-50bps. As a consequence, continuing from what banks witnessed during the
Jul-Sep'11 quarter, we expect systemic net interest margins (NIMs) to remain
elevated during 1HCY12 (with some cyclicality between 4QCY11 and 2QCY12).
In the backdrop of the ongoing slowdown (that has taken its toll on fresh project
sanctions) and elevated interest rate regime (that has taken a toll on companies'
ability to service debt), we expect the proportion of sub-optimal yielding assets
(restructured + impaired) to peak at ~8% (from current levels of ~6%). We expect
banks to push the RBI for concessions on NPA recognition / provisioning for NPAs,
especially in sectors that contribute large-ticket advances (including the
infrastructure sector). This is reflected in our higher bank-specific delinquency
forecasts for FY13E, especially in corporate credit (large and mid-corporates and
SMEs).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
3QFY12 Results Preview
Ambit Capital Pvt Ltd
Banking
Even as lenders come to grips with an uncertain global macro-economic
environment, renewed economic slowdown in the domestic environment
poses key challenges to the banking system from an asset quality and
hence, a financial stability perspective. We expect this macro-economic
uncertainty to mainifest itself in sluggish systemic credit growth (at ~14%
during FY13E) with its consequent implications for asset quality and
earnings. Our base case factors in stressed assets (portfolio of nonperforming
+ restructured advances) accelerating to ~8% (from current
levels of ~5.5%) for banks within our coverage universe.
Preparing for upcoming results
Concomitant with muted credit growth (low volumes synonymous with a seasonally
sluggish quarter), we expect margins to trend lower this quarter for banks within
our coverage universe (ex-SBI). We build in weak fee income growth (YoY growth
at sub-15%) during the quarter in line with the muted loan book growth. While the
pre-provisioning profit is likely to grow at marginally below the pace of loan book
growth, we expect incremental provisioning as well as investment depreciation to
dilute earnings. We expect higher loan loss provisions (from restructured assets as
well as higher organic delinquencies) to exert further downward pressure on
earnings. We also expect weaker forex profits (due to sharp rupee depreciation)
and higher investment depreciation to drag earnings during the quarter. While we
carefully monitor sequential slippage trends across banks, we continue to prefer
Bank of Baroda (BoB) in anticipation of BoB sustaining its relatively low incremental
delinquencies.
Ambit v/s consensus
While our earnings estimates for the quarter versus consensus are about 8%-10%
below consensus, we are 3%-5% below consensus in our earnings expectations for
FY12E. The divergence is predominantly driven by weaker non-interest income
forecasts, our aggressive slippage assumptions and weaker recovery forecasts.
Recommendation
While we expect margins to trend lower for a large number of banks this quarter,
we believe that the system is yet to witness large-scale stress from an asset quality
perspective. We wish to highlight that asset quality is set to worsen for the system
as a whole (as reflected in our forecast revisions for state-owned banks), especially
from corporate credit as a result of the weaker economic growth environment that
is likely to prevail over the next 18 months. We continue to be BUYers in BoB
among the state-owned banks and we continue to like City Union Bank. We
continue to remain SELLers in State Bank of India (SBI) and Axis Bank.
Revision in forecasts for banks within our coverage universe
Why are we revising our estimates?
Given our outlook towards sluggish macro-economic growth in FY13E, a large part
of the revision in the forecasts for banks within our coverage universe is therefore
on account of muted credit growth that we anticipate during FY13E. We build in
systemic credit growth at sub-14% for banks within our coverage universe (down
from around 16%-17%), with consequent implications for fee income as we expect
growth in core fee income to stay muted.
Whilst we envisage a reversal in the interest rate cycle post 4QFY12 (post-March
2012), from a systemic rates perspective, we expect the pace of reduction in
interest rates to be disproportionate through the calendar year. We expect banks
to begin transmitting the benefits of reduced policy rates only beyond the first 25-
50bps (base rates are typically linked to the portfolio cost of funds as a key
variable as opposed to marginal cost of funds) and hence, there would be a lag in
the pace at which banks will transmit the benefits of lower policy rates. Purely from
a systemic perspective, we expect the flip side of base rates to begin affecting
banks during 2HCY12 implying a disproportionate pass-through beyond the initial
25-50bps. As a consequence, continuing from what banks witnessed during the
Jul-Sep'11 quarter, we expect systemic net interest margins (NIMs) to remain
elevated during 1HCY12 (with some cyclicality between 4QCY11 and 2QCY12).
In the backdrop of the ongoing slowdown (that has taken its toll on fresh project
sanctions) and elevated interest rate regime (that has taken a toll on companies'
ability to service debt), we expect the proportion of sub-optimal yielding assets
(restructured + impaired) to peak at ~8% (from current levels of ~6%). We expect
banks to push the RBI for concessions on NPA recognition / provisioning for NPAs,
especially in sectors that contribute large-ticket advances (including the
infrastructure sector). This is reflected in our higher bank-specific delinquency
forecasts for FY13E, especially in corporate credit (large and mid-corporates and
SMEs).
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