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Operating performance remains healthy Slippages decline sequentially; Sharp rise in restructuring
Key highlights for private banks: (1) Largely stable NIM QoQ, (2) Asset quality continues to be strong, with GNPA% stable/declining QoQ, (3) Business growth robust, investment book growth remains healthy, as large corporate funded by credit substitutes, (4) Mid-cap private banks report strong growth in SA Deposit post deregulation of SB rates.
Key highlights for state-owned banks: (1) Largely stable margins QoQ, (2) strong fee income performance QoQ, (3) loan growth improves QoQ, however remains low on a YoY basis. (4) fall in CA deposits leading to muted CASA growth, (5) On a higher base (slippages were at an elevated level as in 2QFY12 most of the state owned banks migrated to system based recognition of NPA), slippages declines sharply QoQ (6) Addition of ~100bp of loans to restructured loans largely led by one large telecom account.
Positive surprises: (1) ICICIBC: Improvement in margins (+10bp QoQ) and strong performance on asset quality. (2) SBIN: Strong margin improvement (+26bp QoQ) (3) BoB: NIM stable QoQ, and robust fee income growth YoY. Among other banks FB, SIB and VYSB also delivered strong NIM and asset quality performance.
Negative surprises: (1) UNBK: Higher provisions due to restructuring of loans (it had taken an NPV hit of 25% on one large telecom account restructured visa–vis 10-15% by its peers). (2) CBK: Sharp contraction in NIM (cal) by 20bp QoQ (3) BoI: Addition to restructured loans of INR30b in 3QFY12.
Operating performance remains healthy Slippages decline sequentially; Sharp rise in restructuring
Key highlights for private banks: (1) Largely stable NIM QoQ, (2) Asset quality continues to be strong, with GNPA% stable/declining QoQ, (3) Business growth robust, investment book growth remains healthy, as large corporate funded by credit substitutes, (4) Mid-cap private banks report strong growth in SA Deposit post deregulation of SB rates.
Key highlights for state-owned banks: (1) Largely stable margins QoQ, (2) strong fee income performance QoQ, (3) loan growth improves QoQ, however remains low on a YoY basis. (4) fall in CA deposits leading to muted CASA growth, (5) On a higher base (slippages were at an elevated level as in 2QFY12 most of the state owned banks migrated to system based recognition of NPA), slippages declines sharply QoQ (6) Addition of ~100bp of loans to restructured loans largely led by one large telecom account.
Positive surprises: (1) ICICIBC: Improvement in margins (+10bp QoQ) and strong performance on asset quality. (2) SBIN: Strong margin improvement (+26bp QoQ) (3) BoB: NIM stable QoQ, and robust fee income growth YoY. Among other banks FB, SIB and VYSB also delivered strong NIM and asset quality performance.
Negative surprises: (1) UNBK: Higher provisions due to restructuring of loans (it had taken an NPV hit of 25% on one large telecom account restructured visa–vis 10-15% by its peers). (2) CBK: Sharp contraction in NIM (cal) by 20bp QoQ (3) BoI: Addition to restructured loans of INR30b in 3QFY12.
NIM performance strong across sector
State-owned banks exhibited stable margin performance despite higher slippages – a positive surprise. SBIN surprised positively with a 26bp QoQ margin improvement. In case of BOB domestic NIMs declined ~15bp QoQ, however 20bp improvement in international NIMs led to largely stable global margins. BoI and OBC reported 20bp+ improvement in margins led by lower interest income reversal during the quarter.
Private banks margins were largely stable QoQ. ICICIBC’s margins improved ~10bp led by ~5bp improvement in domestic margins and ~30bp improvement in international margins. AXSB stable margins QoQ was a positive surprise. YES and IIB reported 10bp decline in margin led by higher cost of funds. FB NIM improved 15bp+ QoQ led by containment of cost of funds. Loan growth picks up QoQ; YTD growth muted for some PSU banks
Loan growth for banks under our coverage was largely in line with industry average. While growth for state-owned banks picked up sequentially, on a YTD basis it remains low (led by impact of slowing corporate loan growth and higher asset quality related issues over past two-three quarters). Sharp depreciation in currency led to strong overall growth for banks with international presence like BoB, BoI and ICICIBC.
Investment growth was also healthy across the sector, especially for private banks, as funding for large corporate happened through credit substitutes due to high base rates across the system.
State-owned reports sharp decline in slippages
Slippages for state-owned banks declined 22% QoQ – on a higher base (annualized slippage ratio of 3.1% v/s 4.2% a quarter ago). One large aviation account led to higher slippages, excluding the same slippages were better or inline with estimates.
On recoveries and up-gradation PNB, UNBK and INBK disappointed whereas, CBK, OBC, ANDB delivered the strong performance
Restructuring during the quarter increased sharply due to one large telecom account. On an average state–owned banks restructured ~100bp of overall loan – of which ~50% was on account of telecom segment. Most of the banks took an NPV hit of 10-15% on this account whereas UNBK took a hit of ~25%. Asset Quality trends will drive valuation from here-on
Downward trend in inflation and moderating growth present a compelling case for reversal in interest rate cycle. This could significantly alter the growth and asset quality outlook.
While slippages have declined, increased restructured loans in 3Q and expected in 1HCY12 remains a concern. Some of the big ticket restructuring like SEBs, Airlines, GTL etc are already getting modeled in estimates and credit costs estimates remain high.
Improvement in growth outlook and lower rates can help mitigate some of these concerns in 2HCY12.
Despite the sharp increase in CY12YTD, PSU bank valuations are still ~10% below the 5-yr averages. Top picks: PSU banks – SBIN and PNB. Private Banks - ICICIBC. In midcap space we like YES and INBK.
For our coverage universe (ex SBIN), NII growth was inline with our expectation. Positive surprise on NII came from SBIN, FB and VYSB led by higher than expected margins. CBK surprised negatively led by lower margins.
Positive surprise on PPP levels came from (a) BOB led by higher than expected trading profits and Forex income and (b) ICICIBC led by maiden dividend from insurance business (5% higher than exp) and (c) FB led by strong top-line performance
Led by deterioration in asset quality and higher restructuring provisions, PNB, and UNBK reported ~12% and ~60% lower than est. PAT. Strong asset quality performance led to better than est. PAT for private banks.
Loan growth: State-owned banks report sequential improvement
Sharp depreciation in currency led to strong overall growth for BOB, BOI, ICICIBC (higher international loan share). International loan growth for these banks stood at 17% QoQ and 65% YoY, 15% QoQ and 46% YoY and 4% QoQ and 38% YoY respectively.
HDFCB witnessed strong growth across categories of retail loans (+8% QoQ and 30% YoY). Conscious decision of moderation in corporate loans (-2% QoQ and 15% YoY) led to moderation in overall loan growth. HDFCB reported the strongest growth of ~55% in CV loans. Credit card and PL grew ~30% YTD.
AXSB and YES reported strong customer asset growth of 9% QoQ and 32% YoY and 7% QoQ and 28% YoY. Robust growth in vehicle finance portfolio (11% QoQ, ~35% YTD and ~45% YoY) is leading to strong growth for IIB.
While ICICIBC retail loans continue to moderate, strong growth in international loans (partially helped by rupee depreciation) and corporate loans led to higher than industry growth sequentially. During 3QFY12 and YTD, ~90% and 100%+ of incremental growth came from international and corporate loans. Adjusted for rupee depreciation, loans grew 16.5% YoY vs. 19% reported.
For PNB, ~45% of incremental loan growth came from Infrastructure and Metals during the quarter. Other PSU banks also reported sequential improvement in loan growth.
CASA growth moderates; Mid cap private banks gain strength
CASA growth moderated, due to cannibalization of savings deposits to term deposits on account of higher interest rate. CASA ratio for most of the PSU banks have declined or at best remained stable QoQ (except BOI). BOB and ANDB reported strong 5%+ QoQ growth in CASA.
Private banks reported healthy QoQ growth both in CA and SA deposits, partially helped by one off large float monies at the end of the quarter. YES, IIB and KMB witnessed strong traction in SA, post deregulation of saving deposit rate leading to sequential improvement in CASA ratio. Yes, IIB and KMB have increased SA Deposit rate by 150-300bp.
CASA growth moderates; Mid cap private banks gain strength
CASA growth moderated, due to cannibalization of savings deposits to term deposits on account of higher interest rate. CASA ratio for most of the PSU banks have declined or at best remained stable QoQ (except BOI). BOB and ANDB reported strong 5%+ QoQ growth in CASA.
Private banks reported healthy QoQ growth both in CA and SA deposits, partially helped by one off large float monies at the end of the quarter. YES, IIB and KMB witnessed strong traction in SA, post deregulation of saving deposit rate leading to sequential improvement in CASA ratio. Yes, IIB and KMB have increased SA Deposit rate by 150-300bp.
NII growth improves, led by uptick in margins
Strong margin performance led to inline/above est. NII for most of the banks under our coverage. Further increase in cost of funds was off-set by higher yield on assets providing cushion to margins.
Sequential NII growth for SBIN, OBC, YES and FB was strong at 10%+ QoQ. SBIN’s strong growth was driven by healthy margin improvement. In 2QFY12, on back of higher slippages OBC had higher interest reversals which reduced in the quarter. ICICIBC NII growth of 8% QoQ was impressive.
CBK is the only PSU bank in our coverage where NII was 10%+ lower than estimates due to sharp drop in margins QoQ (20bp). IIB and YES also reported moderation in margins, but strong volume growth partially offsets the impact
NIMs stable/improving QoQ – a positive surprise
State-owned banks exhibited stable margin performance despite higher slippages – a positive surprise. In case of BOB domestic NIMs declined ~15bp QoQ, however 20bp improvement in international NIMs led to largely stable global NIMs.
BOI improvement in domestic margins by ~15bp (due to higher CD ratio) and ~20bp in international book led to overall improvement QoQ
SBIN’s strong margin performance continues, with NIM up 26bp QoQ (cum. inc. of 98bp during 9MFY12). NIM for INBK and CBK declined by ~20bp QoQ.
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ICICIBC overall margins improved ~10bp led by ~5bp improvement in domestic margins and ~30bp improvement in international margins
Led by higher bulk borrowing cost NIMs declined ~10bp QoQ for YES, IIB and KMB, despite strong traction in SA deposits growth
YES reported 10bp decline in NIM, led by increase in cost of funds and higher deployment of funds in low yielding investments (up 40% YTD).
AXSB (flattish margin), FB (improvement of 15bp+ QoQ) and OBC (+25bp QoQ) are the positive surprises.
Cost of deposits nearing to peak
Slowing loan growth coupled with moderation in bulk deposits led to containment of deposits rates in the system. Further, most banks were averse to increasing retail deposit rates aggressively.
Among large PSBs (except for BoB and BoI – who have large intl. ops.), SBIN enjoys the lowest cost of funds on the back of its strong CASA base.
Deregulation of savings deposit rate was the landmark decision during the quarter and some of the mid cap private sector banks have increased it by 200-300bp, full impact of which will be witnessed in 4QFY12.
We believe cost of deposits have peaked out and expect moderation from 1QFY13. The only caveat remains is persistent tight liquidity.
Bulk funded organizations may witness sharp pressure on cost of funds due to continued tight liquidity in the system.
Fee income growth improves QoQ
On a YoY basis, fee income remained healthy, and on a QoQ basis picked up sharply (on a lower base), for some banks. This could be attributed to pick up in loan growth, higher income from third party distribution and higher forex related income.
PNB, UNBK, ANDB, AXSB, and IIB reported strong fee income growth.
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Change in SBIN’s strategy to focus on yields rather than fees from customers has resulted in margin improvement and moderation of fee income.
IIB reported strong growth in fee income (up 18% QoQ and 47% YoY), led by FX, TPP and processing fees. HDFCB fee income performance was impressive on a YoY basis.
Opex growth largely in line with estimates
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For our coverage universe, opex growth was restricted to ~2% QoQ, led by moderation in opex growth for state-owned banks (on a higher base). For private banks, opex continued to grow at 18%+, led by branch expansion and employee addition.
ICICIBCs’ opex grew 12% YoY (1.3% QoQ), led by moderation in employee expenses (up 10% YoY and flat QoQ). BOR was merged on 12 August 2010, thus, the full impact of which was visible in 3QFY12.
Strong operating leverage is seen for PSU banks, as employee expenses growth moderated on a higher base. However UNBK reported sharp increase in employee expense as it started providing for increase in DA for pension provisions (total amt INR4b, Qtr impact of INR1b).
OBC opex grew 20% QoQ led by strong growth of 25%+ for employee expenses. YES opex grew 10%+ QoQ led by higher recruitment and branch expansion
Core operating profit growth – a mixed bag
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Strong margin performance and sequential pick-up in fee income led to healthy operating profit growth. However, on a YoY basis, stable/declining margins and moderation in loan growth impacted core operating performance.
SBIN reported strong growth in core operating profit performance despite muted fee income growth, led by
strong margin performance (up 26bp QoQ). Other PSU banks performance was mixed with strongest growth coming from PNB, BOB and BOI.
Within private sector banks, strong core PPP was witnessed from VYSB, YES, AXSB and SIB. Other private sector banks earnings were largely inline.
PAT inline; Higher NPV losses leading to lower PAT in some case
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While core operating performance was healthy, higher provisions towards NPA and loan restructured led to higher provisions for some PSU banks impacting profitability. While operating performance was in-line with est. for UNBK, significantly higher provisions led to 66% YoY decline in PAT.
Pvt. Banks profitability remained robust led by stable margins and healthy asset quality performance. PAT for coverage pvt. banks grew ~27% YoY and 15% QoQ.
Strong performance on margin led to inline/above est. NII for most banks under our coverage. Further higher cost of funds was off-set by improvement in yield on assets. Sequential NII growth for OBC, YES and FB was strong at 10%+ QoQ. ICICIBC NII growth of 8% QoQ was impressive.
Fee income growth picked up for most of the banks led by sequential improvement in loan growth and higher forex related gains. IIB, PNB and HDFCB fee income performance was impressive.
Asset quality: Private banks showing an Impressive performance
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Slippages for state-owned banks declined 22% QoQ – on a higher base (annualized slippage ratio of 3.1% v/s 4.2% a quarter ago). One large aviation account led to higher slippages, excluding the same slippages were better or inline with estimates.
On recoveries and up-gradation PNB, UNBK and INBK disappointed whereas, CBK, OBC, ANDB delivered strong performance
Private banks asset quality remained healthy with GNPA and NNPA being largely flattish QoQ. BoI and OBC disappointed with higher restructuring during the quarter of INR30b and INR22b respectively.
Restructuring during the quarter increased sharply due to large telecom account. On an average state –owned banks restructured ~100bp of overall loan – of which ~50% was on account of one large telecom account. Most of the banks took an NPV hit of ~10% on this account whereas UNBK took a hit of ~25%.
Going forward restructuring is expected to increase led by restructuring of SEBs, Air India and other large-mid corporate accounts. Private banks asset quality is expected to remain healthy due to lower restructured loans, lesser proportion of direct agricultural loans and better risk management.
Quarterly snapshot: Healthy growth; Spreads - mixed bag
Business growth remains healthy (ex-SHTF): Business growth for NBFCs under our coverage (ex-SHTF) remained healthy. HFCs continued to witness healthy loan growth. Among IFCs, IDFC surprised with a strong 12% QoQ growth in loan book (after reporting muted growth during 1HFY12). Among VFCs, SHTF continued to witness slowdown in growth, while MMFS maintained healthy growth trend on the back of its diversified portfolio strategy.
Spreads – mixed bag: Spreads / margins for HFCs remained stable, except LICHF as its margins continued to moderate on the back of rising costs. Among IFCs, IDFCs spreads improved due to better liability management, while POWF and RECL’s margins contracted sequentially due to interest reversal on large accounts slipping into NPAs. NIMs for VFCs declined QoQ. SHTF’s margins declined sharply (~80bp QoQ) on account of pressure on yields.
Asset quality remained healthy (ex-IFCs): Asset quality for HFCs and VFCs remained stable QoQ. SHTF wrote off residual loans exposed to the mining segment in the states of AP, Karnataka and Goa during the quarter. Among IFCs, GNPAs increased QoQ due to some large power projects slipping into NPAs for POWF and RECL, while for IDFC one small account (from tourism segment) slipped into NPA.
We maintain neutral on the sector due to regulatory headwinds, impending changes in 1) asset classification and provisioning norms 2) changes in classification of PSL loans and 3) final guidelines on securitization of loans. Reversal in interest rate cycle could act as a major catalyst and alter the growth and margin outlook significantly. Among NBFCs we prefer IDFC.
HFCs: Growth momentum maintained; stable margins
Growth momentum maintained: The healthy loan growth momentum for HFCs was maintained during the quarter. Among HFCs under coverage DEWH continued to grow strongly at 50% YoY, while HDFC and LICHF too continued to grow at a steady clip.
Spreads remain stable (ex-LICHF): HDFC and DEWH reported stable spread/margins. However, LICHF surprised negatively with a 18bp QoQ contraction in reported NIMs. Margin contraction for LICHF has continued for the third consecutive quarter. DEWH has maintained its margins within a narrow band between 2.8%-3.0% over a period of time, which is commendable.
Stable asset quality: Asset quality has remained stable QoQ and no major threat to the same is expected in the near to medium term.
Outlook: We expect growth momentum to continue on the back of latent demand in the mortgage space and peaking of interest rate cycle. For DEWH, inability to raise capital could affect its growth trajectory, while movement in margins will remain a key monitorable for LICHF.
VFCs: Margins remain under pressure; Growth healthy (ex-SHTF)
Loan growth (ex-SHTF) remains healthy: Despite slowdown in auto sales, the AUM growth for MMFS for the quarter remained healthy. However, SHTF continued to witness moderation in its asset growth on the back of sluggish CV demand and intensifying competitive landscape.
Spreads remain under pressure: Spreads/margins remained under pressure 1) on account of rising cost of funds and inability of vehicle financiers to pass on the complete increase in cost of borrowings 2) intensifying competitive landscape affecting yields and thereby margins (in case of SHTF).
Asset quality remained stable: Asset quality remained stable with no major negative surprises. SHTF made a write off of INR200m on its residual portfolio exposed to the mining sector in the states of AP, Karnataka and Goa. With this, SHTF has no pending exposure in the mining regions of AP, Karnataka and Goa.
Outlook: Growth in the vehicle financing segment is likely to remain sluggish due to 1) slowing auto sales and 2) rising competition from small private banks and other NBFCs in the CV financing segment. Margins should stabilize / improve from hereon with interest rate cycle likely to reverse sooner than later.
India Equity Research Reports, IPO and Stock News
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Operating performance remains healthy Slippages decline sequentially; Sharp rise in restructuring
Key highlights for private banks: (1) Largely stable NIM QoQ, (2) Asset quality continues to be strong, with GNPA% stable/declining QoQ, (3) Business growth robust, investment book growth remains healthy, as large corporate funded by credit substitutes, (4) Mid-cap private banks report strong growth in SA Deposit post deregulation of SB rates.
Key highlights for state-owned banks: (1) Largely stable margins QoQ, (2) strong fee income performance QoQ, (3) loan growth improves QoQ, however remains low on a YoY basis. (4) fall in CA deposits leading to muted CASA growth, (5) On a higher base (slippages were at an elevated level as in 2QFY12 most of the state owned banks migrated to system based recognition of NPA), slippages declines sharply QoQ (6) Addition of ~100bp of loans to restructured loans largely led by one large telecom account.
Positive surprises: (1) ICICIBC: Improvement in margins (+10bp QoQ) and strong performance on asset quality. (2) SBIN: Strong margin improvement (+26bp QoQ) (3) BoB: NIM stable QoQ, and robust fee income growth YoY. Among other banks FB, SIB and VYSB also delivered strong NIM and asset quality performance.
Negative surprises: (1) UNBK: Higher provisions due to restructuring of loans (it had taken an NPV hit of 25% on one large telecom account restructured visa–vis 10-15% by its peers). (2) CBK: Sharp contraction in NIM (cal) by 20bp QoQ (3) BoI: Addition to restructured loans of INR30b in 3QFY12.
Operating performance remains healthy Slippages decline sequentially; Sharp rise in restructuring
Key highlights for private banks: (1) Largely stable NIM QoQ, (2) Asset quality continues to be strong, with GNPA% stable/declining QoQ, (3) Business growth robust, investment book growth remains healthy, as large corporate funded by credit substitutes, (4) Mid-cap private banks report strong growth in SA Deposit post deregulation of SB rates.
Key highlights for state-owned banks: (1) Largely stable margins QoQ, (2) strong fee income performance QoQ, (3) loan growth improves QoQ, however remains low on a YoY basis. (4) fall in CA deposits leading to muted CASA growth, (5) On a higher base (slippages were at an elevated level as in 2QFY12 most of the state owned banks migrated to system based recognition of NPA), slippages declines sharply QoQ (6) Addition of ~100bp of loans to restructured loans largely led by one large telecom account.
Positive surprises: (1) ICICIBC: Improvement in margins (+10bp QoQ) and strong performance on asset quality. (2) SBIN: Strong margin improvement (+26bp QoQ) (3) BoB: NIM stable QoQ, and robust fee income growth YoY. Among other banks FB, SIB and VYSB also delivered strong NIM and asset quality performance.
Negative surprises: (1) UNBK: Higher provisions due to restructuring of loans (it had taken an NPV hit of 25% on one large telecom account restructured visa–vis 10-15% by its peers). (2) CBK: Sharp contraction in NIM (cal) by 20bp QoQ (3) BoI: Addition to restructured loans of INR30b in 3QFY12.
NIM performance strong across sector
State-owned banks exhibited stable margin performance despite higher slippages – a positive surprise. SBIN surprised positively with a 26bp QoQ margin improvement. In case of BOB domestic NIMs declined ~15bp QoQ, however 20bp improvement in international NIMs led to largely stable global margins. BoI and OBC reported 20bp+ improvement in margins led by lower interest income reversal during the quarter.
Private banks margins were largely stable QoQ. ICICIBC’s margins improved ~10bp led by ~5bp improvement in domestic margins and ~30bp improvement in international margins. AXSB stable margins QoQ was a positive surprise. YES and IIB reported 10bp decline in margin led by higher cost of funds. FB NIM improved 15bp+ QoQ led by containment of cost of funds. Loan growth picks up QoQ; YTD growth muted for some PSU banks
Loan growth for banks under our coverage was largely in line with industry average. While growth for state-owned banks picked up sequentially, on a YTD basis it remains low (led by impact of slowing corporate loan growth and higher asset quality related issues over past two-three quarters). Sharp depreciation in currency led to strong overall growth for banks with international presence like BoB, BoI and ICICIBC.
Investment growth was also healthy across the sector, especially for private banks, as funding for large corporate happened through credit substitutes due to high base rates across the system.
State-owned reports sharp decline in slippages
Slippages for state-owned banks declined 22% QoQ – on a higher base (annualized slippage ratio of 3.1% v/s 4.2% a quarter ago). One large aviation account led to higher slippages, excluding the same slippages were better or inline with estimates.
On recoveries and up-gradation PNB, UNBK and INBK disappointed whereas, CBK, OBC, ANDB delivered the strong performance
Restructuring during the quarter increased sharply due to one large telecom account. On an average state–owned banks restructured ~100bp of overall loan – of which ~50% was on account of telecom segment. Most of the banks took an NPV hit of 10-15% on this account whereas UNBK took a hit of ~25%. Asset Quality trends will drive valuation from here-on
Downward trend in inflation and moderating growth present a compelling case for reversal in interest rate cycle. This could significantly alter the growth and asset quality outlook.
While slippages have declined, increased restructured loans in 3Q and expected in 1HCY12 remains a concern. Some of the big ticket restructuring like SEBs, Airlines, GTL etc are already getting modeled in estimates and credit costs estimates remain high.
Improvement in growth outlook and lower rates can help mitigate some of these concerns in 2HCY12.
Despite the sharp increase in CY12YTD, PSU bank valuations are still ~10% below the 5-yr averages. Top picks: PSU banks – SBIN and PNB. Private Banks - ICICIBC. In midcap space we like YES and INBK.
For our coverage universe (ex SBIN), NII growth was inline with our expectation. Positive surprise on NII came from SBIN, FB and VYSB led by higher than expected margins. CBK surprised negatively led by lower margins.
Positive surprise on PPP levels came from (a) BOB led by higher than expected trading profits and Forex income and (b) ICICIBC led by maiden dividend from insurance business (5% higher than exp) and (c) FB led by strong top-line performance
Led by deterioration in asset quality and higher restructuring provisions, PNB, and UNBK reported ~12% and ~60% lower than est. PAT. Strong asset quality performance led to better than est. PAT for private banks.
Loan growth: State-owned banks report sequential improvement
Sharp depreciation in currency led to strong overall growth for BOB, BOI, ICICIBC (higher international loan share). International loan growth for these banks stood at 17% QoQ and 65% YoY, 15% QoQ and 46% YoY and 4% QoQ and 38% YoY respectively.
HDFCB witnessed strong growth across categories of retail loans (+8% QoQ and 30% YoY). Conscious decision of moderation in corporate loans (-2% QoQ and 15% YoY) led to moderation in overall loan growth. HDFCB reported the strongest growth of ~55% in CV loans. Credit card and PL grew ~30% YTD.
AXSB and YES reported strong customer asset growth of 9% QoQ and 32% YoY and 7% QoQ and 28% YoY. Robust growth in vehicle finance portfolio (11% QoQ, ~35% YTD and ~45% YoY) is leading to strong growth for IIB.
While ICICIBC retail loans continue to moderate, strong growth in international loans (partially helped by rupee depreciation) and corporate loans led to higher than industry growth sequentially. During 3QFY12 and YTD, ~90% and 100%+ of incremental growth came from international and corporate loans. Adjusted for rupee depreciation, loans grew 16.5% YoY vs. 19% reported.
For PNB, ~45% of incremental loan growth came from Infrastructure and Metals during the quarter. Other PSU banks also reported sequential improvement in loan growth.
CASA growth moderates; Mid cap private banks gain strength
CASA growth moderated, due to cannibalization of savings deposits to term deposits on account of higher interest rate. CASA ratio for most of the PSU banks have declined or at best remained stable QoQ (except BOI). BOB and ANDB reported strong 5%+ QoQ growth in CASA.
Private banks reported healthy QoQ growth both in CA and SA deposits, partially helped by one off large float monies at the end of the quarter. YES, IIB and KMB witnessed strong traction in SA, post deregulation of saving deposit rate leading to sequential improvement in CASA ratio. Yes, IIB and KMB have increased SA Deposit rate by 150-300bp.
CASA growth moderates; Mid cap private banks gain strength
CASA growth moderated, due to cannibalization of savings deposits to term deposits on account of higher interest rate. CASA ratio for most of the PSU banks have declined or at best remained stable QoQ (except BOI). BOB and ANDB reported strong 5%+ QoQ growth in CASA.
Private banks reported healthy QoQ growth both in CA and SA deposits, partially helped by one off large float monies at the end of the quarter. YES, IIB and KMB witnessed strong traction in SA, post deregulation of saving deposit rate leading to sequential improvement in CASA ratio. Yes, IIB and KMB have increased SA Deposit rate by 150-300bp.
NII growth improves, led by uptick in margins
Strong margin performance led to inline/above est. NII for most of the banks under our coverage. Further increase in cost of funds was off-set by higher yield on assets providing cushion to margins.
Sequential NII growth for SBIN, OBC, YES and FB was strong at 10%+ QoQ. SBIN’s strong growth was driven by healthy margin improvement. In 2QFY12, on back of higher slippages OBC had higher interest reversals which reduced in the quarter. ICICIBC NII growth of 8% QoQ was impressive.
CBK is the only PSU bank in our coverage where NII was 10%+ lower than estimates due to sharp drop in margins QoQ (20bp). IIB and YES also reported moderation in margins, but strong volume growth partially offsets the impact
NIMs stable/improving QoQ – a positive surprise
State-owned banks exhibited stable margin performance despite higher slippages – a positive surprise. In case of BOB domestic NIMs declined ~15bp QoQ, however 20bp improvement in international NIMs led to largely stable global NIMs.
BOI improvement in domestic margins by ~15bp (due to higher CD ratio) and ~20bp in international book led to overall improvement QoQ
SBIN’s strong margin performance continues, with NIM up 26bp QoQ (cum. inc. of 98bp during 9MFY12). NIM for INBK and CBK declined by ~20bp QoQ.
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ICICIBC overall margins improved ~10bp led by ~5bp improvement in domestic margins and ~30bp improvement in international margins
Led by higher bulk borrowing cost NIMs declined ~10bp QoQ for YES, IIB and KMB, despite strong traction in SA deposits growth
YES reported 10bp decline in NIM, led by increase in cost of funds and higher deployment of funds in low yielding investments (up 40% YTD).
AXSB (flattish margin), FB (improvement of 15bp+ QoQ) and OBC (+25bp QoQ) are the positive surprises.
Cost of deposits nearing to peak
Slowing loan growth coupled with moderation in bulk deposits led to containment of deposits rates in the system. Further, most banks were averse to increasing retail deposit rates aggressively.
Among large PSBs (except for BoB and BoI – who have large intl. ops.), SBIN enjoys the lowest cost of funds on the back of its strong CASA base.
Deregulation of savings deposit rate was the landmark decision during the quarter and some of the mid cap private sector banks have increased it by 200-300bp, full impact of which will be witnessed in 4QFY12.
We believe cost of deposits have peaked out and expect moderation from 1QFY13. The only caveat remains is persistent tight liquidity.
Bulk funded organizations may witness sharp pressure on cost of funds due to continued tight liquidity in the system.
Fee income growth improves QoQ
On a YoY basis, fee income remained healthy, and on a QoQ basis picked up sharply (on a lower base), for some banks. This could be attributed to pick up in loan growth, higher income from third party distribution and higher forex related income.
PNB, UNBK, ANDB, AXSB, and IIB reported strong fee income growth.
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Change in SBIN’s strategy to focus on yields rather than fees from customers has resulted in margin improvement and moderation of fee income.
IIB reported strong growth in fee income (up 18% QoQ and 47% YoY), led by FX, TPP and processing fees. HDFCB fee income performance was impressive on a YoY basis.
Opex growth largely in line with estimates
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For our coverage universe, opex growth was restricted to ~2% QoQ, led by moderation in opex growth for state-owned banks (on a higher base). For private banks, opex continued to grow at 18%+, led by branch expansion and employee addition.
ICICIBCs’ opex grew 12% YoY (1.3% QoQ), led by moderation in employee expenses (up 10% YoY and flat QoQ). BOR was merged on 12 August 2010, thus, the full impact of which was visible in 3QFY12.
Strong operating leverage is seen for PSU banks, as employee expenses growth moderated on a higher base. However UNBK reported sharp increase in employee expense as it started providing for increase in DA for pension provisions (total amt INR4b, Qtr impact of INR1b).
OBC opex grew 20% QoQ led by strong growth of 25%+ for employee expenses. YES opex grew 10%+ QoQ led by higher recruitment and branch expansion
Core operating profit growth – a mixed bag
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Strong margin performance and sequential pick-up in fee income led to healthy operating profit growth. However, on a YoY basis, stable/declining margins and moderation in loan growth impacted core operating performance.
SBIN reported strong growth in core operating profit performance despite muted fee income growth, led by
strong margin performance (up 26bp QoQ). Other PSU banks performance was mixed with strongest growth coming from PNB, BOB and BOI.
Within private sector banks, strong core PPP was witnessed from VYSB, YES, AXSB and SIB. Other private sector banks earnings were largely inline.
PAT inline; Higher NPV losses leading to lower PAT in some case
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While core operating performance was healthy, higher provisions towards NPA and loan restructured led to higher provisions for some PSU banks impacting profitability. While operating performance was in-line with est. for UNBK, significantly higher provisions led to 66% YoY decline in PAT.
Pvt. Banks profitability remained robust led by stable margins and healthy asset quality performance. PAT for coverage pvt. banks grew ~27% YoY and 15% QoQ.
Strong performance on margin led to inline/above est. NII for most banks under our coverage. Further higher cost of funds was off-set by improvement in yield on assets. Sequential NII growth for OBC, YES and FB was strong at 10%+ QoQ. ICICIBC NII growth of 8% QoQ was impressive.
Fee income growth picked up for most of the banks led by sequential improvement in loan growth and higher forex related gains. IIB, PNB and HDFCB fee income performance was impressive.
Asset quality: Private banks showing an Impressive performance
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Slippages for state-owned banks declined 22% QoQ – on a higher base (annualized slippage ratio of 3.1% v/s 4.2% a quarter ago). One large aviation account led to higher slippages, excluding the same slippages were better or inline with estimates.
On recoveries and up-gradation PNB, UNBK and INBK disappointed whereas, CBK, OBC, ANDB delivered strong performance
Private banks asset quality remained healthy with GNPA and NNPA being largely flattish QoQ. BoI and OBC disappointed with higher restructuring during the quarter of INR30b and INR22b respectively.
Restructuring during the quarter increased sharply due to large telecom account. On an average state –owned banks restructured ~100bp of overall loan – of which ~50% was on account of one large telecom account. Most of the banks took an NPV hit of ~10% on this account whereas UNBK took a hit of ~25%.
Going forward restructuring is expected to increase led by restructuring of SEBs, Air India and other large-mid corporate accounts. Private banks asset quality is expected to remain healthy due to lower restructured loans, lesser proportion of direct agricultural loans and better risk management.
Quarterly snapshot: Healthy growth; Spreads - mixed bag
Business growth remains healthy (ex-SHTF): Business growth for NBFCs under our coverage (ex-SHTF) remained healthy. HFCs continued to witness healthy loan growth. Among IFCs, IDFC surprised with a strong 12% QoQ growth in loan book (after reporting muted growth during 1HFY12). Among VFCs, SHTF continued to witness slowdown in growth, while MMFS maintained healthy growth trend on the back of its diversified portfolio strategy.
Spreads – mixed bag: Spreads / margins for HFCs remained stable, except LICHF as its margins continued to moderate on the back of rising costs. Among IFCs, IDFCs spreads improved due to better liability management, while POWF and RECL’s margins contracted sequentially due to interest reversal on large accounts slipping into NPAs. NIMs for VFCs declined QoQ. SHTF’s margins declined sharply (~80bp QoQ) on account of pressure on yields.
Asset quality remained healthy (ex-IFCs): Asset quality for HFCs and VFCs remained stable QoQ. SHTF wrote off residual loans exposed to the mining segment in the states of AP, Karnataka and Goa during the quarter. Among IFCs, GNPAs increased QoQ due to some large power projects slipping into NPAs for POWF and RECL, while for IDFC one small account (from tourism segment) slipped into NPA.
We maintain neutral on the sector due to regulatory headwinds, impending changes in 1) asset classification and provisioning norms 2) changes in classification of PSL loans and 3) final guidelines on securitization of loans. Reversal in interest rate cycle could act as a major catalyst and alter the growth and margin outlook significantly. Among NBFCs we prefer IDFC.
HFCs: Growth momentum maintained; stable margins
Growth momentum maintained: The healthy loan growth momentum for HFCs was maintained during the quarter. Among HFCs under coverage DEWH continued to grow strongly at 50% YoY, while HDFC and LICHF too continued to grow at a steady clip.
Spreads remain stable (ex-LICHF): HDFC and DEWH reported stable spread/margins. However, LICHF surprised negatively with a 18bp QoQ contraction in reported NIMs. Margin contraction for LICHF has continued for the third consecutive quarter. DEWH has maintained its margins within a narrow band between 2.8%-3.0% over a period of time, which is commendable.
Stable asset quality: Asset quality has remained stable QoQ and no major threat to the same is expected in the near to medium term.
Outlook: We expect growth momentum to continue on the back of latent demand in the mortgage space and peaking of interest rate cycle. For DEWH, inability to raise capital could affect its growth trajectory, while movement in margins will remain a key monitorable for LICHF.
VFCs: Margins remain under pressure; Growth healthy (ex-SHTF)
Loan growth (ex-SHTF) remains healthy: Despite slowdown in auto sales, the AUM growth for MMFS for the quarter remained healthy. However, SHTF continued to witness moderation in its asset growth on the back of sluggish CV demand and intensifying competitive landscape.
Spreads remain under pressure: Spreads/margins remained under pressure 1) on account of rising cost of funds and inability of vehicle financiers to pass on the complete increase in cost of borrowings 2) intensifying competitive landscape affecting yields and thereby margins (in case of SHTF).
Asset quality remained stable: Asset quality remained stable with no major negative surprises. SHTF made a write off of INR200m on its residual portfolio exposed to the mining sector in the states of AP, Karnataka and Goa. With this, SHTF has no pending exposure in the mining regions of AP, Karnataka and Goa.
Outlook: Growth in the vehicle financing segment is likely to remain sluggish due to 1) slowing auto sales and 2) rising competition from small private banks and other NBFCs in the CV financing segment. Margins should stabilize / improve from hereon with interest rate cycle likely to reverse sooner than later.
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