India Banks --1Q12 Results Round-Up: Treading on Softer Ground  Citi

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India Banks
1Q12 Results Round-Up: Treading on Softer Ground
 1Q12 profits (ex-SBI) up 10% (vs 18% exp); softer margins, higher loan losses —
Most Indian banks have reported 1Q12 earnings (except SBI), we look at key trends so
far: a) Overall profits for the sector were up 10% yoy (lower than our 18% exp), ex-SBI
ex-ICICI profits were up 7% yoy (vs our +12% estimates); b) PSU banks (ex-SBI) had
significantly weaker earnings (down 4% yoy vs +8% exp), private banks largely in line
(+25% yoy); c) Key earnings drags were lower NIMs (down ~30bps qoq) and higher
loan loss provisions. Overall, a weak quarter, more so for PSU banks.
 Margins down, but should stabilize; PSU banks’ credit costs to remain high —
Key trends in 1Q12 were: A) NIMs down more than expected (-30bps qoq) as funding
costs were up sharply. However, recently banks have raised lending rates aggressively
(25-50bps), which should protect NIMs near term. B) Loan growth still relatively high
(+20% yoy), higher lending rates (and slower economy) should moderate growth earlier
than expected. C) Credit costs were dichotomous – lower for private banks, but sharply
higher for PSU banks (combination of slippages from restructured loans and
tighter/automated NPL recognition and provisioning). We expect PSU bank credit costs
to remain rel. high near term as the impact of technology transition is still not over.
 Private banks perform significantly better, to retain positive gap — Private banks
fared significantly better than PSU banks again: a) Profits up 25% yoy for private vs -
4% for PSU; b) NIM pressures managed relatively better (down 10-20bps vs 30bps
avg. for PSU) due to better funding mix; c) Asset quality pressures significantly lesser
than PSU banks (loan loss charges down 43% for private vs +44% for PSU). We
expect private banks to start outpacing PSU banks on loan growth as well, retain NIM
and asset quality outperformance, thereby maintaining their performance gap.
 Near-term caution stays; like Axis, SBI as turnaround plays — We retain our nearterm
caution on banks as the impact of macro pressures on growth, asset quality are
still uncertain. We continue to like Axis and SBI within the sector, as leveraged plays on
easier macro, higher growth rates and better sustainable profitability potential