Steady earnings for private banks and NBFCs; upgrading UNBK to Buy
We expect steady earnings and asset quality to continue for private banks and
NBFCs in 4QFY13, aided by stable NIMs and capital issuances by Axis and IIB.
PSU banks are likely to see a QoQ improvement in gross and net slippages,
even while remaining high. Overall for banks, we expect NII to grow 8% YoY
and PAT to fall 1% YoY (private banks +21%, +22%). NBFCs’ earnings growth
is likely to be 26%. The recent sharp correction seems unjustified, and has
made valuations very attractive, in our view. We upgrade Union Bank to Buy
given the attractive valuations. We maintain a preference for ICICI, Axis, Yes
and IIB. We like PNB, Canara and BOI among the PSU banks.
NIM should remain stable; SBI is worst positioned
We think banks like Axis and IIB, which have raised equity capital, should
witness a QoQ NIM expansion. We expect most other private banks to witness
a stable QoQ NIM, with a rise on a YoY basis. While select public banks, such
as Canara and BOI, should also benefit, due to lower wholesale rates, we
believe the cut in base rates will neutralize this, to some extent. We expect SBI
to be the worst-positioned on margins, as its funding costs will be slow to fall,
as it is largely retail-funded, coupled with its intent to grow fast.
Asset quality may surprise positively on reported NPLs; restructuring may rise
As we have been highlighting, in terms of overall reported numbers, the
worsening phase on slippages is over, even though any improvement will be
gradual. We maintain our view that net slippages for PSU banks are likely to be
lower than 3Q levels, but that the pace of restructuring may continue.
However, credit costs are likely to remain high for public banks, as these banks
improve their provision coverage levels. Among the private banks, we expect
similar positive trends to continue, with no meaningful deviation. On retail
assets, we remain positive, despite some pressure in the CV portfolio.
On PSU banks, we lower our earnings forecasts and target prices marginally
Overall, in line with our thoughts on loan growth and margins, we have
reduced our earnings estimates for the PSU Banks by 2-9% and our target
prices by 3-9%. However, given their very attractive valuations, we remain
positive on these banks. Post a very sharp decline in stock prices, we upgrade
our recommendation on Union Bank to Buy.
NBFCs: another quarter of strong earnings
We expect NBFCs to continue to report stable asset quality in 4QFY13, with no
surprises likely. NIMs are likely to remain stable, even as we expect loan
growth to remain strong for most players. Overall, we expect NBFCs to report
net profit growth of 25% YoY during 4QFY13.
Valuation and risks
We value the Indian banks’ lending businesses on a two-stage residual income
model, insurance on appraisal value, asset management on percentage of
AUM and other non-banking businesses on P/E or P/B. Key upside risks are a
much lower NPL formation and higher-than-expected loan growth, driven by
economic recovery in FY14. The biggest downside risk is a sharply weaker
macro environment, which could result in higher-than-expected delinquencies,
in turn resulting in higher provisions
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We expect steady earnings and asset quality to continue for private banks and
NBFCs in 4QFY13, aided by stable NIMs and capital issuances by Axis and IIB.
PSU banks are likely to see a QoQ improvement in gross and net slippages,
even while remaining high. Overall for banks, we expect NII to grow 8% YoY
and PAT to fall 1% YoY (private banks +21%, +22%). NBFCs’ earnings growth
is likely to be 26%. The recent sharp correction seems unjustified, and has
made valuations very attractive, in our view. We upgrade Union Bank to Buy
given the attractive valuations. We maintain a preference for ICICI, Axis, Yes
and IIB. We like PNB, Canara and BOI among the PSU banks.
NIM should remain stable; SBI is worst positioned
We think banks like Axis and IIB, which have raised equity capital, should
witness a QoQ NIM expansion. We expect most other private banks to witness
a stable QoQ NIM, with a rise on a YoY basis. While select public banks, such
as Canara and BOI, should also benefit, due to lower wholesale rates, we
believe the cut in base rates will neutralize this, to some extent. We expect SBI
to be the worst-positioned on margins, as its funding costs will be slow to fall,
as it is largely retail-funded, coupled with its intent to grow fast.
Asset quality may surprise positively on reported NPLs; restructuring may rise
As we have been highlighting, in terms of overall reported numbers, the
worsening phase on slippages is over, even though any improvement will be
gradual. We maintain our view that net slippages for PSU banks are likely to be
lower than 3Q levels, but that the pace of restructuring may continue.
However, credit costs are likely to remain high for public banks, as these banks
improve their provision coverage levels. Among the private banks, we expect
similar positive trends to continue, with no meaningful deviation. On retail
assets, we remain positive, despite some pressure in the CV portfolio.
On PSU banks, we lower our earnings forecasts and target prices marginally
Overall, in line with our thoughts on loan growth and margins, we have
reduced our earnings estimates for the PSU Banks by 2-9% and our target
prices by 3-9%. However, given their very attractive valuations, we remain
positive on these banks. Post a very sharp decline in stock prices, we upgrade
our recommendation on Union Bank to Buy.
NBFCs: another quarter of strong earnings
We expect NBFCs to continue to report stable asset quality in 4QFY13, with no
surprises likely. NIMs are likely to remain stable, even as we expect loan
growth to remain strong for most players. Overall, we expect NBFCs to report
net profit growth of 25% YoY during 4QFY13.
Valuation and risks
We value the Indian banks’ lending businesses on a two-stage residual income
model, insurance on appraisal value, asset management on percentage of
AUM and other non-banking businesses on P/E or P/B. Key upside risks are a
much lower NPL formation and higher-than-expected loan growth, driven by
economic recovery in FY14. The biggest downside risk is a sharply weaker
macro environment, which could result in higher-than-expected delinquencies,
in turn resulting in higher provisions
Upgrading UNBK to Buy; changing earnings/TPs for PSU banks
Upgrading UNKB to Buy: fundamentals stable, valuations attractive post correction
„
Union Bank stock has fallen 16% over the past three months relative to a 10%
decline in the BSE Bankex and a 3.4% decline in the BSE Sensex. We believe the
stock decline is driven by fears of worsening asset quality, the outlook for which
remains stable, in our view.
„
We estimate loan growth of 18% for both FY14 and FY15 and NIM to remain stable
at ~3%. After two bad years of asset quality in FY12 and FY13E, we expect
slippages, and consequently asset quality to moderate in FY14E. We have lowered
our FY14 net profit estimate by 5%, as we reduce our NIM assumptions, and we
have also lowered our target price by 3.2%, to INR 300.
„
We upgrade our recommendation on Union Bank to Buy, even though we reduce
our earnings estimates, as we believe the current valuation, at 0.8x FY14E P/B, is
attractive, for a likely 15% RoE.
Reducing earnings estimates and target prices for PSU Banks
We have lowered our earnings estimates for a few PSU banks, as we build in lower
loan growth and marginally lower margins. We remain conservative on our earnings
estimates, as we continue to expect higher provisions, as banks will need to increase
their provision coverage in FY14. We also increase our cost assumptions, due to higher
wage provisions that may be made in FY14 for the new wage settlement.
Consequently, our target prices for the PSU Banks are also reduced, by 3-9%
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