PL INDIA: Financials - A story of contracting halves

PL INDIA 

Financials

Post Conference Update - A story of contracting halves

We conducted our Banks/Financials conference with participation from ~20 banks/NBFCs and banking tour covering regulators/industry experts. Overall feedback suggested very weak credit offtake but extremely mixed views on near term asset quality. Apart from easing rates, the most certain positive outcome was on easing regulatory pressure for the sector especially for NBFCs. Overall feedback was split in two contrasting halves with PSU banks at one end and retail banks/NBFCs on the other (positive) and corporate banks/financiers like ICICI/IDFC having a mixed outlook. We continue our preference for ICICI/Axis/Yes and also believe most retail NBFCs are well positioned for an easing rate cycle and risks from tightening regulations is nearing the end.

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n  Growth targets revised down; a few exceptions though: Most banks have revised their system growth target to ~14-15% with negligible term/capex related off take and SME/Retail is thus the focus area. PSU banks were most cautious on growth outlook also constrained by FinMin dictat on bulk deposits. Among private banks/NBFCs, kotak's caution inched up (~20% now v/s 25% earlier) and Shriram (12-15%) continues with its low growth expectations. Mahindra Finance (~30%) still remains most sanguine on growth, followed byIndusInd (+25%). ICICI bank still remains positive on domestic loan book (20% growth) but expects slower core fee income momentum (<10 font="font" growth="growth">

n  Margins to look up; especially for private banks/NBFCs: Lower wholesale rates is a boon for NBFCs and also for banks like ICICI/Yes aided by lower competition on bulk deposits. Pricing power is robust on the corporate side with retail seeing some pricing competition. In spite of higher competition, retail banks/NBFCs with fixed rate book (MMFS/HDFCB/KMB/IIB) and wholesale funded institutions like IDFC/Yes have a positive outlook on margins. Reduced dependence on bulk deposits is a structural positive for PSUs but we believe PSU's marginsmay be impacted as the rate cut cycle begins in 2H13. Incremental spreads for LICHF is fine (1.6-1.7%) but slow disbursements in builder portfolio with impact the margin improvement process.

n  Mixed feedback on Asset quality: (1) Retail asset quality continues to hold firm except for CVs whereSHTF/IIB continue to be sanguine but Kotak/HDFCB and more importantly, CIBIL seemed more cautious.(2)Asset quality for PSU banks continue to remain more linked to macro which is not showing signs of pick-up as yet (3) PFC/REC were positive on SEB reforms but CRISIL was suspect on a complete turnaround for SEBs and PFC’s involvement in most stressed power assets is a further drag (4) Private corporate financiers likeICICI/Yes/IDFC expect some marginal inch up in NPAs but don’t see material change to their credit costs guidance (ICICI -70/75bps, IDFC- Gross NPA of 1%).

n  Regulatory intensity to come off; a certain positive in an uncertain environment:  We believe regulatory intensity will be significantly lower now with RBI keen to implement most regulations relating to NBFCs in a non-disruptive way (90 v/s 180 days) and pausing on tightening for gold NBFCs. Dynamic provisions (final guidelines under work) could pose some challenges for banks but RBI does not see capital issues for most banks under BASEL III.