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3Q Preview: PSU & PVT: The difference is provisions
We estimate 15% y/y net profit growth in 3QFY12E for our
coverage universe, with PSUs at 12% and PVT at 20%
2 key trends to watch: Higher margins for most banks,
higher provisions mainly for PSUs; Restructuring likely to be
an ongoing phenomenon at least in 1H this year
Stock positioning: Stay with PVT sector – Prefer YES,
IndusInd, LICHF in midcap and ICICI, HDFC in large cap
3Q earnings are expected to be fairly healthy notwithstanding the poor stock sentiment
and overhang of asset quality and growth issues. Balance sheet growth is likely to be 3-
4% sequentially and margins too are likely to improve sequentially as the base rate hikes
of July take full impact and lower slippages should take away less from interest income as
system-based NPL recognition no longer remains an overhang.
PSU banks are likely to fare well at the operating profit level (15% y/y growth) given
better margins. However, 33% y/y increase in provisions is likely to translate into 12% net
profit growth. On a sequential basis however, provisions are likely to be lower (for
reasons mentioned above) propping up net profit growth by 19%. PVT banks are likely to
fare almost equally well as their PSU peers except that provisioning pressure isn’t likely
to be as much leading to 20% y/y net profit growth.
Margins & Asset quality: We are likely at near peak margin levels this and next quarter
after which any rate cuts would likely impact loan yields quicker than deposit costs. Also,
we may see improved NPL recoveries and optically lower slippages particularly at PSU
banks as system-recognition of NPLs ended in Sep11. However, we see the scope of
increasing loan restructurings across a variety of sectors including SEBs, airlines, metals
and various export-linked SMEs which is likely to act as a continuous sentiment
dampener until clarity emerges on a turning economic cycle.
Capital requirements: A host of PSU and PVT banks are likely to see capital infusion over
the next 2 years, the former mainly from the Government and the latter mainly from the
markets. With Basle-3 draft guidelines under debate and implementation spread over FY12-
18, banks with higher capital levels are likely to be viewed more positively, including HFCs.
Preferred stocks: We prefer private names at this time, given higher growth, greater
earnings clarity and fewer asset quality issues. With the mid-caps we prefer the smaller
private names like YES (YESB.BO, INR249, OW) and IndusInd (INBK.BO, INR246, OW)
as well as LICHF (LICHF.BO, INR228, OW(V)) while we prefer ICICI Bank (ICBK.BO,
INR748, OW) and HDFC Ltd (HDFC.BO, INR663, OW) in the large-cap space.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Financials
3Q Preview: PSU & PVT: The difference is provisions
We estimate 15% y/y net profit growth in 3QFY12E for our
coverage universe, with PSUs at 12% and PVT at 20%
2 key trends to watch: Higher margins for most banks,
higher provisions mainly for PSUs; Restructuring likely to be
an ongoing phenomenon at least in 1H this year
Stock positioning: Stay with PVT sector – Prefer YES,
IndusInd, LICHF in midcap and ICICI, HDFC in large cap
3Q earnings are expected to be fairly healthy notwithstanding the poor stock sentiment
and overhang of asset quality and growth issues. Balance sheet growth is likely to be 3-
4% sequentially and margins too are likely to improve sequentially as the base rate hikes
of July take full impact and lower slippages should take away less from interest income as
system-based NPL recognition no longer remains an overhang.
PSU banks are likely to fare well at the operating profit level (15% y/y growth) given
better margins. However, 33% y/y increase in provisions is likely to translate into 12% net
profit growth. On a sequential basis however, provisions are likely to be lower (for
reasons mentioned above) propping up net profit growth by 19%. PVT banks are likely to
fare almost equally well as their PSU peers except that provisioning pressure isn’t likely
to be as much leading to 20% y/y net profit growth.
Margins & Asset quality: We are likely at near peak margin levels this and next quarter
after which any rate cuts would likely impact loan yields quicker than deposit costs. Also,
we may see improved NPL recoveries and optically lower slippages particularly at PSU
banks as system-recognition of NPLs ended in Sep11. However, we see the scope of
increasing loan restructurings across a variety of sectors including SEBs, airlines, metals
and various export-linked SMEs which is likely to act as a continuous sentiment
dampener until clarity emerges on a turning economic cycle.
Capital requirements: A host of PSU and PVT banks are likely to see capital infusion over
the next 2 years, the former mainly from the Government and the latter mainly from the
markets. With Basle-3 draft guidelines under debate and implementation spread over FY12-
18, banks with higher capital levels are likely to be viewed more positively, including HFCs.
Preferred stocks: We prefer private names at this time, given higher growth, greater
earnings clarity and fewer asset quality issues. With the mid-caps we prefer the smaller
private names like YES (YESB.BO, INR249, OW) and IndusInd (INBK.BO, INR246, OW)
as well as LICHF (LICHF.BO, INR228, OW(V)) while we prefer ICICI Bank (ICBK.BO,
INR748, OW) and HDFC Ltd (HDFC.BO, INR663, OW) in the large-cap space.
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