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India Financials
4Q12 Preview: What NOT to expect
We do not expect an acceleration in loan growth (17-19% y/y)
or a margin pickup, particularly as rate rigidity sets in
We do not expect an improvement in impaired loans or
credit costs; However, slippage ratios may plateau and
recovery ratios may start looking up; Overall, a single digit
q/q growth in earnings appears unexciting this quarter
HFCs likely to be in favour as rate cycle tops out, teaser rate
loans reprice and new loan growth remains robust
Variance vs consensus Our 4Q12 net profit estimates are 10-15% below the street for
PSU banks and broadly in line for private banks. We believe the key reason for the
deviation for PSU banks is our expectations of sequentially weaker margins given the
high cost of short-term borrowings in 4Q.
Growth trends are distorted for the PSU banks on a Y/Y basis given that last year 4Q
saw i) chunky pension provisioning for PSUs and ii) several one-offs for SBI dragging
down earnings growth 99%. On a quarterly basis, we expect PSU banks earnings growth
to be in a range of -9% to +9% except for Union Bank which we see much higher
sequential growth given the chunky, conservative provisioning hit it took last quarter on
GTL. For private banks we expect 22% y/y growth in earnings but limited to 2% q/q
mainly due to some margin pressures.
Rate rigidity likely to dominate worries as several banks have raised deposit rates given
persistent liquidity tightness and increasing competition in household savings from i)
physical assets, ii) tax-free investments and iii) higher savings account rates. It is hard to
imagine how margins could expand in a soft credit cycle given these rigidities and the
oncoming inflation from fuel, electricity and freight rates.
Restructured loans continue to act as the single biggest pressure point against an
improving outlook on asset quality. With each week bringing new cases (chunky or
otherwise) to the fore in terms of restructurings, credit costs are unlikely to see any major
or sustained downtrend especially if dynamic provisioning norms are introduced this year
by the RBI. However, we may see some improvement in both slippage and recovery ratios
from this or the next quarter. Also, with the recent proposed tariff hikes announced by a
couple of SEBs, there is some light at the end of the ‘power-tunnel’.
Stock preferences remain centered around private names, especially HFCs which are
likely to enjoy a more stable growth and asset quality outlook.
Valuations and risks
We base our weights for PE, PB and EPM on macro factors influencing the sector. Historically, PE holds
sway above PB in valuing banking stocks during a recovering credit cycle. As economic growth peaks,
the focus is likely to shift from earnings growth potential towards asset quality and the risk to book. The
three-stage EPM uses explicit forecasts until FY14e, followed by 10 years of semi-explicit forecasts. The
final stage of 12 years (fade period) assumes convergence of ROE and COE
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Financials
4Q12 Preview: What NOT to expect
We do not expect an acceleration in loan growth (17-19% y/y)
or a margin pickup, particularly as rate rigidity sets in
We do not expect an improvement in impaired loans or
credit costs; However, slippage ratios may plateau and
recovery ratios may start looking up; Overall, a single digit
q/q growth in earnings appears unexciting this quarter
HFCs likely to be in favour as rate cycle tops out, teaser rate
loans reprice and new loan growth remains robust
Variance vs consensus Our 4Q12 net profit estimates are 10-15% below the street for
PSU banks and broadly in line for private banks. We believe the key reason for the
deviation for PSU banks is our expectations of sequentially weaker margins given the
high cost of short-term borrowings in 4Q.
Growth trends are distorted for the PSU banks on a Y/Y basis given that last year 4Q
saw i) chunky pension provisioning for PSUs and ii) several one-offs for SBI dragging
down earnings growth 99%. On a quarterly basis, we expect PSU banks earnings growth
to be in a range of -9% to +9% except for Union Bank which we see much higher
sequential growth given the chunky, conservative provisioning hit it took last quarter on
GTL. For private banks we expect 22% y/y growth in earnings but limited to 2% q/q
mainly due to some margin pressures.
Rate rigidity likely to dominate worries as several banks have raised deposit rates given
persistent liquidity tightness and increasing competition in household savings from i)
physical assets, ii) tax-free investments and iii) higher savings account rates. It is hard to
imagine how margins could expand in a soft credit cycle given these rigidities and the
oncoming inflation from fuel, electricity and freight rates.
Restructured loans continue to act as the single biggest pressure point against an
improving outlook on asset quality. With each week bringing new cases (chunky or
otherwise) to the fore in terms of restructurings, credit costs are unlikely to see any major
or sustained downtrend especially if dynamic provisioning norms are introduced this year
by the RBI. However, we may see some improvement in both slippage and recovery ratios
from this or the next quarter. Also, with the recent proposed tariff hikes announced by a
couple of SEBs, there is some light at the end of the ‘power-tunnel’.
Stock preferences remain centered around private names, especially HFCs which are
likely to enjoy a more stable growth and asset quality outlook.
Valuations and risks
We base our weights for PE, PB and EPM on macro factors influencing the sector. Historically, PE holds
sway above PB in valuing banking stocks during a recovering credit cycle. As economic growth peaks,
the focus is likely to shift from earnings growth potential towards asset quality and the risk to book. The
three-stage EPM uses explicit forecasts until FY14e, followed by 10 years of semi-explicit forecasts. The
final stage of 12 years (fade period) assumes convergence of ROE and COE
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