Roadshow wrap: Waiting for the April spring :: HSBC

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Indian Financials
Roadshow wrap: Waiting for the April spring 
The future: Basel III and IFRS are key variables for 2013
The present: Mediocre loan growth, flat margins and more
slippages was the story for the remainder of this year; but
expectations of easier liquidity, quicker loan growth and
improving asset quality are likely beginning FY12
The recent past: Bribery case, telecom and microfinance
exposures do not appear to worry most banks; our top picks
remain smaller private banks – YES, IndusInd – while PSUs
have some way to go before we get convinced




We met CEOs, CFOs of 14 financial companies across a three-day roadshow with the mood
being guarded to optimistic. The troika of recent concerns dominated discussions as did the
twin issues of new capital and accounting norms, and a view on operational outlook.

Three recent concerns? Not really: While most banks relegated the bribery news to the
past, classifying them as individual cases of corruption, the impact was likely to be a
short-term delay in loan processing and approvals, particularly for the commercial real
estate sector where the consequence might be lower prices. Similarly, in the opinion of
several participants the telecom scam repercussions were unlikely to be more than some
sorts of penalties being charged. In addition, banks’ exposure to new 2G players is
relatively low. The microfinance issue was the only issue for which participants
anticipated tangible losses in the near term, but that too was underplayed as exposure
proportion was generally about 1% of loan book and about 30% was Andhra Pradesh
related exposure. Also with more clarity expected on regulation by January, the potential
spread of default to other states looks limited.

Near-term outlook – guardedly positive: System loan growth seen at 18-20% this year
and a little higher next year driven by infra and secured retail loans, working capital
showing some signs of pick-up given tight liquidity, but manufacturing capex not yet
evident. Most expected their margins to remain flat barring specific cases like IDBI Bank
and IndusInd, who expect a structural uptick. Slippages likely to continue for the next
quarter or two, but at a reducing pace. Easier liquidity starting April 2011 and pick-up in
loan growth likely to drive earnings beyond the next 4-5 months.

2013 changes: With higher capital requirements almost being a certainty under Basel III
and IFRS accounting likely to result in generally a neutral to positive impact, we prefer
smaller, higher growth, higher visibility, better capitalised private banks over PSUs