Financials - Sector Update - Slowly stepping out of the problem zone :: Centrum

The inherent nature of problems including inflation, interest rates
and asset quality makes us believe that current sector valuations are
a bit stretched in the context of expected policy reforms across core
sector growth. Though initial actions of the new government show
efforts in reviving growth and the upcoming Union budget could lay out
the roadmap for fiscal consolidation, we expect the re-rating to be a
gradual process. We stick with our preference for well-positioned
private banks - ICICI Bank, DCB Bank and City Union Bank. Within PSUs,
we prefer SBI to PNB.

$ Domestic factors improve: Easing twin deficits, efforts towards
reviving core sectors of growth and macro-recovery provide comfort on
the economic front. The decisive election outcome and efforts by the
central bank to arrest NPAs (creation of joint lender forum), address
capital issues (deferring of Basel-III by one-year) and ensuring
adequate liquidity in the system (term repo auctions) have helped
valuations swiftly adjust to these expectations.

$ Inflation, interest rate and asset quality, key challenges: In our
last updates, we pointed out that the limited fiscal room will
restrict the scope of material easing in interest rates. Interactions
with industry experts point to continued levels of stress asset
additions that is evident from a) 44% yoy increase in referrals to CDR
cell for FY14 b) slippages from the restructured pool at 25% (avg) and
c) huge surge in assets sold to ARCs. Compliance with Basel III norms,
though postponed by one year, effective management is vital to prevent
the risk of frequent dilution and consequently impact RoEs.

$ Budget expectation: While the roadmap for fiscal consolidation will
remain the key focus area and determine the trajectory of interest
rates, we  need to watch out for measures taken on a) recapitalisation
of PSU banks b) creation of holding company structure / reduction in
government holding in PSU banks and c ) creation of bad bank (to
absorb NPAs). Sops to the housing sector in the form of interest
subvention / increase in affordable housing limit / increase in tax
deduction limits could add further impetus to the sector.

$ Q1FY15E Quarterly preview – Sluggish quarter; asset quality, a
concern: We expect modest 14% yoy growth in net interest income and
flat margins. The larger challenge remains with a) lower fee income
(could be offset by treasury gains b) employee expenses, specifically
for PSU banks and c) asset quality related provisioning. We expect our
coverage universe (6 banks) to report 12% yoy / 5% yoy growth in
operating profit / net profit for Q1FY15. Housing finance companies
will continue to witness stable growth. Mahindra Finance will face
challenges on AuM growth and asset quality. CARE and CRISIL should
witness 17.5% yoy growth in revenues and expansion in EBIDTA margins.





Thanks & Regards

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