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Banks/Financial Institutions
India
Trends in (transition-led) slippages are the key monitorable. We believe that NPL
formations (unlike loan and earnings growth) will be the primary focus this quarter
given (1) the anxiety build around stressed assets in the system and (2) banks’ transition
to the last leg of system-based NPL recognition platform. We expect weaker trends in
fees even as select NBFCs/retail businesses retain high growth traction. While margins
trends will be stable, provisions will likely decline qoq. We maintain our positive view on
ICICI Bank and Federal Bank among private banks and PNB and Union Bank among
public sector banks; prefer IDFC and Mahindra Finance.
Focus on slippages as banks move towards the last phase of transition; provisions to decline
We believe that public and private sector banks will report divergent trends on NPL formations in
2QFY12E. PSU banks will report higher delinquencies as they will likely complete their stringent
NPL recognition platform in the current quarter (especially for small-ticket loans) whereas we find
limited concern for private banks. However, overall increase in gross NPLs will be lower as we
expect recovery trends to be strong. Provisions will likely decline qoq as the previous quarter saw
banks taking a charge on revised NPL and restructuring provisioning norms.
Earnings growth muted at 10% yoy led by weak earnings growth for public banks
We expect 10% earnings growth for banks primarily due to weak earnings growth for public
banks while pressure on revenue growth (NII and fee income) would increase for all banks. We
expect 3% yoy (18% qoq led by lower provisioning) earnings growth for public banks while
private banks would grow by 27% yoy (9% qoq). Non-interest income will remain subdued on the
back of weak fee income growth. We expect NII growth at 12% yoy (12% for public banks and
14% for private banks). We expect operating expenses to remain stable.
NBFCs will likely report divergent trends in earnings. While retail NBFCs will likely report steady
trends, forex losses will pull down earnings for PFC and REC. We expect Union Bank and SBI in
public sector and most private sector banks to show earnings growth over 12% yoy aided by
lower base earnings; Mahindra Finance will likely deliver 23% growth on the back of strong
business traction.
Margins to remain stable for the quarter; muted YTD loan growth performance
Margins will remain stable for the quarter as banks have taken aggressive hikes in lending rates
between May and August 2011 while deposit rates have not seen similar increases across tenors
and wholesales rates have been stable since 4QFY11. Income de-recognition on higher slippages
would remain a key risk for public banks despite sharp increase in lending rates. Loan deposit ratio
has been stable at 75%. YTD growth in loans for FY2011 (April-September 2011) has been muted
at 4% though headline growth remains impressive at 20% yoy levels.
Most NBFCs will likely report sharp yoy NIM decline – 10-60 bps yoy. On a qoq basis, we expect
NIMs to move up marginally as the rise in interest rates gets reflected in loan assets. Lower
competitive intensity across products significantly reduces NIM pressure over the next few
quarters.
NBFC: Going strong
We expect most NBFCs to report divergent trends in reported earnings. Lower yoy
margins for most NBFCs, flat qoq loan book (only in case of IDFC) and forex losses for PFC
and REC will tamper earnings.
Sharp rise in borrowings cost over the past few months affected NIM over the past few
quarters. Incrementally NIM will likely improve qoq, though on a yoy basis NIM will be
much lower. Lower competition, across retail and infra lending, will help NBFCs to priceup
loan assets. Most NBFCs have indicated that any further rise in interest rates may hurt
demand even as competition is lower. A decline in interest by 4QFY11 will likely boost
NIMs.
While incremental trends in NIMs may be better, loan growth will likely be stable to
moderate. We expect lower traction in infra NBFCs – this will affect approvals across the
sector; loan growth for IDFC will be lower, we may not find any impact on PFC and REC
as yet. Retail NBFCs will likely report steady growth albeit some weakness on new
business may be seen. Slowdown in large housing markets (Mumbai and Delhi) will
continue to affect the business of housing finance companies.
Large forex losses will likely pull down earnings for PFC and REC. We expect PFC to report
MTM loss of about Rs5 bn on the back of large un-hedged exposures. As of June 2011,
PFC had the following un-hedged exposures (1) US$383 mn, (2) JPY42 bn, (3) Euro23 mn.
YTD loan growth at 4%; infrastructure remains primary source of loan off-take
Loan growth continues to show signs of moderation despite yoy growth trends showing a
strong headline number of 20% yoy. YTD growth (April-September 2011) is at 4% with
infrastructure being the primary source of loan off-take. We expect a marginal increase in
loan book across all banks for the quarter.
As per the last reported data, CD ratio was at 74% (flat qoq). Borrowings through external
credit/short-term credit from abroad continued to remain healthy. Banks’ investments in
commercial paper and corporate debentures have increased to `160 bn (23% qoq) and
`923 bn (6% qoq).
Margins to see limited pressure; expect a stable performance qoq
2QFY12E should see limited pressure on margins as banks have taken aggressive lending
rate hikes in the past few quarters while hikes in retail deposit rates have been taken only in
selected buckets and wholesale rates have been stable (with a downward bias) since
4QFY11. We expect margins to remain flat (+/-10 bps qoq) across all banks.
Overall, we expect NII to grow by about 12% yoy (2% qoq) with public sector banks
growing by 12% yoy (3% qoq) and private sector banks by 14% yoy (3% qoq). OBC,
Corporation Bank and Canara Bank should see fairly weak NII growth for the quarter.
Income de-recognition on account of higher slippages would remain a key risk for public
banks. IOB and SBI would have strong quarters on the back of a lower base and sharp
increase in lending rates while we expect stable performance from private sector banks.
Subdued non-interest income; limited treasury gains
Non-interest income will remain subdued for another quarter on the back of lower treasury
gains and slower fee income growth. Low loan book activity and pressure on fee income
from third-party distribution (mainly for private banks) should result in subdued performance.
There have been limited opportunities for banks to have made gains on their investment
portfolio during the quarter. During the quarter, the yield curve continued to remain flat
across tenors. 10-year, 5-year, 2-year and 1-year are at 8.4-8.4% levels and have not
changed significantly from the previous quarter which should result in lower investment
provisions. As against a 30-70 bps increase in the previous quarter, the current quarter saw
the 1, 2, 5 and 10-year bonds increase by 18, 11, 0 and 20 bps qoq, respectively.
Slippages and provisions to remain high; transition exercise to complete in 2Q
The quarter should see divergence continue between public and private sector banks on NPL
formations. PSU banks would be completely moving towards a stringent NPL recognition
platform (shift in all small-ticket loans in the current quarter) which would result in higher
delinquencies. We see limited concern for private banks for another quarter. Overall increase
in gross NPLs to be lower as recovery trends are expected to remain strong.
Provisions will decline qoq as the previous quarter saw banks taking a charge for the revised
NPL and restructuring provisioning norms. We expect a slowdown in fresh restructuring and
slippages from this book in the current quarter.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Banks/Financial Institutions
India
Trends in (transition-led) slippages are the key monitorable. We believe that NPL
formations (unlike loan and earnings growth) will be the primary focus this quarter
given (1) the anxiety build around stressed assets in the system and (2) banks’ transition
to the last leg of system-based NPL recognition platform. We expect weaker trends in
fees even as select NBFCs/retail businesses retain high growth traction. While margins
trends will be stable, provisions will likely decline qoq. We maintain our positive view on
ICICI Bank and Federal Bank among private banks and PNB and Union Bank among
public sector banks; prefer IDFC and Mahindra Finance.
Focus on slippages as banks move towards the last phase of transition; provisions to decline
We believe that public and private sector banks will report divergent trends on NPL formations in
2QFY12E. PSU banks will report higher delinquencies as they will likely complete their stringent
NPL recognition platform in the current quarter (especially for small-ticket loans) whereas we find
limited concern for private banks. However, overall increase in gross NPLs will be lower as we
expect recovery trends to be strong. Provisions will likely decline qoq as the previous quarter saw
banks taking a charge on revised NPL and restructuring provisioning norms.
Earnings growth muted at 10% yoy led by weak earnings growth for public banks
We expect 10% earnings growth for banks primarily due to weak earnings growth for public
banks while pressure on revenue growth (NII and fee income) would increase for all banks. We
expect 3% yoy (18% qoq led by lower provisioning) earnings growth for public banks while
private banks would grow by 27% yoy (9% qoq). Non-interest income will remain subdued on the
back of weak fee income growth. We expect NII growth at 12% yoy (12% for public banks and
14% for private banks). We expect operating expenses to remain stable.
NBFCs will likely report divergent trends in earnings. While retail NBFCs will likely report steady
trends, forex losses will pull down earnings for PFC and REC. We expect Union Bank and SBI in
public sector and most private sector banks to show earnings growth over 12% yoy aided by
lower base earnings; Mahindra Finance will likely deliver 23% growth on the back of strong
business traction.
Margins to remain stable for the quarter; muted YTD loan growth performance
Margins will remain stable for the quarter as banks have taken aggressive hikes in lending rates
between May and August 2011 while deposit rates have not seen similar increases across tenors
and wholesales rates have been stable since 4QFY11. Income de-recognition on higher slippages
would remain a key risk for public banks despite sharp increase in lending rates. Loan deposit ratio
has been stable at 75%. YTD growth in loans for FY2011 (April-September 2011) has been muted
at 4% though headline growth remains impressive at 20% yoy levels.
Most NBFCs will likely report sharp yoy NIM decline – 10-60 bps yoy. On a qoq basis, we expect
NIMs to move up marginally as the rise in interest rates gets reflected in loan assets. Lower
competitive intensity across products significantly reduces NIM pressure over the next few
quarters.
NBFC: Going strong
We expect most NBFCs to report divergent trends in reported earnings. Lower yoy
margins for most NBFCs, flat qoq loan book (only in case of IDFC) and forex losses for PFC
and REC will tamper earnings.
Sharp rise in borrowings cost over the past few months affected NIM over the past few
quarters. Incrementally NIM will likely improve qoq, though on a yoy basis NIM will be
much lower. Lower competition, across retail and infra lending, will help NBFCs to priceup
loan assets. Most NBFCs have indicated that any further rise in interest rates may hurt
demand even as competition is lower. A decline in interest by 4QFY11 will likely boost
NIMs.
While incremental trends in NIMs may be better, loan growth will likely be stable to
moderate. We expect lower traction in infra NBFCs – this will affect approvals across the
sector; loan growth for IDFC will be lower, we may not find any impact on PFC and REC
as yet. Retail NBFCs will likely report steady growth albeit some weakness on new
business may be seen. Slowdown in large housing markets (Mumbai and Delhi) will
continue to affect the business of housing finance companies.
Large forex losses will likely pull down earnings for PFC and REC. We expect PFC to report
MTM loss of about Rs5 bn on the back of large un-hedged exposures. As of June 2011,
PFC had the following un-hedged exposures (1) US$383 mn, (2) JPY42 bn, (3) Euro23 mn.
YTD loan growth at 4%; infrastructure remains primary source of loan off-take
Loan growth continues to show signs of moderation despite yoy growth trends showing a
strong headline number of 20% yoy. YTD growth (April-September 2011) is at 4% with
infrastructure being the primary source of loan off-take. We expect a marginal increase in
loan book across all banks for the quarter.
As per the last reported data, CD ratio was at 74% (flat qoq). Borrowings through external
credit/short-term credit from abroad continued to remain healthy. Banks’ investments in
commercial paper and corporate debentures have increased to `160 bn (23% qoq) and
`923 bn (6% qoq).
Margins to see limited pressure; expect a stable performance qoq
2QFY12E should see limited pressure on margins as banks have taken aggressive lending
rate hikes in the past few quarters while hikes in retail deposit rates have been taken only in
selected buckets and wholesale rates have been stable (with a downward bias) since
4QFY11. We expect margins to remain flat (+/-10 bps qoq) across all banks.
Overall, we expect NII to grow by about 12% yoy (2% qoq) with public sector banks
growing by 12% yoy (3% qoq) and private sector banks by 14% yoy (3% qoq). OBC,
Corporation Bank and Canara Bank should see fairly weak NII growth for the quarter.
Income de-recognition on account of higher slippages would remain a key risk for public
banks. IOB and SBI would have strong quarters on the back of a lower base and sharp
increase in lending rates while we expect stable performance from private sector banks.
Subdued non-interest income; limited treasury gains
Non-interest income will remain subdued for another quarter on the back of lower treasury
gains and slower fee income growth. Low loan book activity and pressure on fee income
from third-party distribution (mainly for private banks) should result in subdued performance.
There have been limited opportunities for banks to have made gains on their investment
portfolio during the quarter. During the quarter, the yield curve continued to remain flat
across tenors. 10-year, 5-year, 2-year and 1-year are at 8.4-8.4% levels and have not
changed significantly from the previous quarter which should result in lower investment
provisions. As against a 30-70 bps increase in the previous quarter, the current quarter saw
the 1, 2, 5 and 10-year bonds increase by 18, 11, 0 and 20 bps qoq, respectively.
Slippages and provisions to remain high; transition exercise to complete in 2Q
The quarter should see divergence continue between public and private sector banks on NPL
formations. PSU banks would be completely moving towards a stringent NPL recognition
platform (shift in all small-ticket loans in the current quarter) which would result in higher
delinquencies. We see limited concern for private banks for another quarter. Overall increase
in gross NPLs to be lower as recovery trends are expected to remain strong.
Provisions will decline qoq as the previous quarter saw banks taking a charge for the revised
NPL and restructuring provisioning norms. We expect a slowdown in fresh restructuring and
slippages from this book in the current quarter.
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