Nomura research, India financials - Weak 4QFY15F, but expectations are low PPOP stabilising and status quo on asset quality

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4QFY15F: PPOP deceleration slows; status quo on asset quality
We believe the Indian banks will report 4Q asset quality in line with their weak
guidance. While delinquency levels will likely rise from 3QFY15 levels, investor
expectations are low, hence results may not be as disappointing. Loan growth
remains a constraint and that has likely had an impact on NII and fee growth.
However, we expect stable NIMs as banks have delayed their base-rate cuts.
Overall, we expect PPOP/PAT growth of 18%/13% y-y for private banks and
flat PPOP for PSUs. While 4QFY15F looks muted, valuations now look
reasonable following the recent correction. We like Axis (AXSB IN, Buy) and
ICICI (ICICIBC IN, Buy) equally given their valuation difference now. PSUs will
likely remain difficult to time but we remain positive on State Bank (SBIN IN),
Bank of Baroda (BOB IN) and Union Bank (UNBK IN) (all Buys). HDFCB and
YES (both Buys) will likely surprise on growth with stable asset quality.
Our key 4QFY15F sector-wise expectations
 Private banks: PPOP growth should rise to 19% y-y after dipping to 16% in
1HFY15F. While retail banks will maintain stable asset quality trends,
delinquency levels will remain elevated as guided for ICICI/Axis. FY16F
delinquency guidance is keenly awaited – our checks with investors suggest
that they would be okay with flat FY16 guidance on slippages with higher
delinquency in 1HFY16 and lower stress accretion in 2HFY16.
 PSUs: 3QFY15 was disappointing (ex SBI) and while delinquency levels will
likely remain elevated, our checks with the PSUs do not point to a quantum
jump in delinquencies that would negatively surprise vs muted market
expectations. A lumpiness in restructuring is likely, but may not be as
pronounced as expected. Surprisingly, PSUs have not indicated of large
negative surprise on pension provisions due to lower discount rate.
 NBFCs: Unseasonal rainfall will likely affect any recovery in growth and the
asset quality expected from rural NBFCs, eg, MMFS (Neutral), and to some
extent Shriram (SHTF IN, Buy). The cost of funds, though, will likely
continue to trend lower and have a positive impact on margins.
What to look out for in 4QFY16F: Scope for earnings revisions?
 ICICI/Axis: Focus will remain on 4Q delinquency and FY16 guidance.
ICICI’s asset quality will likely remain uninspiring on growth and delinquency
(INR45bn expected), but we believe this is in the price (<1 .7x="" book="" fy17f="" of="" p="">INR151). Delinquencies for Axis should rise to INR22bn in 4QFY15F (FY15
total at INR57bn) from lines. Any spike beyond INR60bn would likely be taken negatively.
 PSUs: We expect weak numbers from PNB (Neutral)/BOI (Buy). While BOB
is likely to report similar slippages as in 3QFY15, we continue to believe that
its underwriting is relatively better. Our management interactions suggest
stable trends for SBI and some improvement for Union Bank vs weak 3Q.
 HDFCB and Yes Bank will likely see strong growth momentum with stable
asset quality and could surprise positively.
 MMFS will likely continue to disappoint, but valuation looks reasonable at
~1.8x Mar-17F book of INR129. LICHF (Neutral) remains the best rate cycle
play, but the sequential rise in the past six months has lagged market
expectations.