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Banks/Financial Institutions
India
Focus shifts to restructuring from slippages. We see sharper focus on restructured
loans in 3QFY12E than on slippages/increases in gross NPLs. Reported NPLs are likely to
remain sequentially stable generally, and in the case of a few banks, surprisingly
positive. Margins are expected to remain healthy but loan growth is likely to moderate
for all banks. NBFCs will continue to drive strong loan growth though NIMs are close to
their nadir, in our view. Most preferred picks: ICICI Bank and Federal Bank among
private banks, PNB among public banks, IDFC and Mahindra Finance among NBFCs.
Restructured loans to increase gradually; NPLs to remain flat qoq
We see focus shifting to restructured loans in the current quarter, especially with large loanadditions
to the CDR cell and reports of various SEBs requesting a revised, elongated payment
schedule. Lower slippages and better recovery trends will keep overall gross NPLs flat qoq. We
expect select banks to report a decline in gross NPL ratios as the focus has shifted to asset quality
from growth. Apart from a 2% provision for fresh restructured loans we don’t see a major impact
on earnings in the quarter from loan-loss provisions.
Flat earnings yoy led by 4% earnings decline for public sector banks
We expect yoy earnings to remain flat (5% qoq) for banks mainly due to weak earnings growth of
public sector banks. Besides, pressure on revenue growth (NII and fee income) is expected to
increase marginally for all banks. We expect 4% yoy (5% qoq growth led by lower provisioning)
decline in earnings for public sector banks and private banks to grow by 15% yoy (6% qoq). Non
interest income is expected to be subdued due to weak fee-income growth. We expect NII growth
of 10% yoy (9% for public sector banks and 15% for private banks). We expect operating
expenses to be stable and the equity portfolio will need higher MTM provision compared with the
bond portfolio in 3QFY12E.
NBFCs are likely to report divergent trends in earnings. While loan growth will remain high, NIMs
are expected to be under pressure and are now close to their nadir. We expect SBI in the public
sector and most private sector banks to post earnings growth of over 12% yoy, aided by lower
base earnings. Stable NIMs, moderate loan growth (about 17%) and capital gains on the sale of
stake in the AMC business will drive IDFC’s earnings growth. Mahindra Finance is likely to deliver
28% growth in core earnings due to strong business traction.
NIMs to remain stable qoq; muted YTD loan growth though alternative channels have increased
We expect NIMs to remain stable in 3QFY12E as banks continue to enjoy pricing power and
interest rates for wholesale deposits have been stable over the past two quarters. We expect NIMs
to be lower by about 10 bps qoq. Loan deposit ratio has been stable at about 74%. YTD growth
in loans for FY2011 (April – December 16, 2011) has been muted at 8% (4% qoq) though
headline growth appears to be higher at about 17% yoy. We note that banks’ investments in CPs
and corporate debentures have increased by 40% and 8% qoq respectively.
Most NBFCs are likely to report a sharp yoy decline in NIMs (50-80 bps). On a qoq basis, we expect
NIMs to decline by 10-20 bps as the rise in interest rates is reflected in loan assets. Incremental
borrowing costs have declined, especially for short to medium term borrowings. Lower competitive
intensity across products and a likely decline in interest rates in the system in 1QFY13E reduces
NIM pressure over the next few quarters.
NBFC: Loan growth remains strong, margins close to their nadir
Divergent trends in PAT. We expect most NBFCs to report divergent trends in reported
earnings. Lower yoy margins for LICHF and accounting treatment of forex losses for PFC
and REC will temper reported PAT.
Margins close to their nadir. We believe NIMs for most NBFCs will bottom out in
3QFY12E. Incremental borrowing costs are now lower than weighted average borrowing
costs especially for NBFCs focused on short to medium term assets/ borrowings. Better
recoveries in 4QFY12E and a likely moderation in interest rates in 1QFY13E are likely to
boost margins, in our view.
Strong loan growth for most. Most NBFCs will continue to deliver strong (20%+)
growth in the loan book due to buoyant retail businesses. Undisbursed approvals will
drive growth for PFC and REC, and IDFC is likely to continue to report moderation (~17%)
in loan growth.
Weaker trends in incremental business. We expect lower approvals for infrastructure
NBFCs. IDFC’s loan growth will be lower, but PFC and REC may not yet be impacted.
Retail NBFCs are likely to report steady growth albeit some weakness in new business.
Slowdown in large housing markets (Mumbai and Delhi), will continue to affect the
businesses of housing finance companies.
Large forex loans likely to tamper earnings for PFC and REC. PFC has proposed to
write back MTM losses reported in 1HFY12. As such, reported earnings are likely to be
higher. We are not clear about the accounting policy that REC will follow and we are not
factoring MTM losses for REC/any likely reversal in our estimates. On a notional basis, we
estimate Rs250 mn MTM losses for REC in 3QFY12E and losses of over Rs4 bn for PFC.
YTD loan growth 8%; infrastructure remains primary source of loan off-take
Loan growth showed signs of moderation despite yoy growth trends showing a strong
headline number of 17-18% yoy. YTD growth (April – December 16, 2011) was 8%, with
infrastructure being the primary source of loan off-take. In line with the busy 2HFY12E, loan
growth improved 4% qoq but is lower than that over the past few years.
As per the last reported data, CD ratio was 74% (flat qoq). Borrowing through external
credit/short-term credit from abroad remained healthy. Banks’ investments in commercial
paper and corporate debentures increased to `268 bn (42% qoq) and `1096 bn (8% qoq),
respectively, indicating partial substitution of credit from the banking channel.
Margins to see limited pressure; expect a stable performance qoq
In 3QFY12E, margins are likely to come under limited pressure as pricing power continues to
favor banks. The liquidity environment has deteriorated in recent weeks and has been higher
than the RBI’s expectation for the quarter. Wholesale and retail deposit rates have been
stable in 3QFY12 and we expect margins to be flat (+/-10 bps qoq) across all banks.
Overall, we expect NII to grow by about 10% yoy (2% qoq) with public sector banks
growing by 9% yoy (1% qoq) and private sector banks by 15% yoy (5% qoq). BoI, Canara
Bank, OBC and Corporation Bank are likely to see fairly weak NII growth in 3QFY12E. We
expect IOB and SBI to have a strong quarter due to a lower base and a sharp increase in
lending rates. Private sector banks are likely to post stable performance.
Treasury gains expected to support non-interest income; fee income to be weak
We expect non-interest income growth to be supported by treasury gains and better
recovery trends but we expect core fee income to remain under pressure. Low loan book
activity, pressure on fee income from third-party distribution (mainly for private banks) are
expected to subdue performance.
In 3QFY12 banks have had better opportunity than they did in previous quarters to make
gains on their investment portfolio. During the quarter, the yield curve closed flat across
tenors despite high volatility. The 10-year, 5-year, 2-year and 1-year bonds are about 8.4%
and have not changed significantly from 2QFY12. However, a sharp drop from highs of 8.9-
9% should provide some opportunity for banks to make trading profits. In 3QFY12 the 1, 2,
5 and 10 year bonds increased by 0, -10, 15 and 10 bps qoq, respectively, against a 10-20
bps increase in 2QFY12.
Slippages and provisions likely to decline qoq; better recovery expected
especially from loans that slipped due to transition exercise
In 3QFY12E we expect slippages and provisions to decline sequentially but outstanding
restructured loans to increase for the industry. Agriculture loans are likely to perform better
in terms of slippages and recoveries as 3QFY12 is a seasonally strong quarter. With banks
strengthening their recovery process, especially after the transition exercise, resulting in
higher NPLs, we expect higher recoveries/upgradation in 3QFY12E. We see limited concern
for private banks for another quarter. Overall increase in gross NPLs is likely to be lower as
recovery trends are expected to remain strong.
Provisions are likely to decline sequentially as in 2QFY12 banks took the charge for transition
related loans and SBI saw higher provisions to meet regulatory requirements. Restructuring is
likely to remain high and would be a key monitorable for all banks – especially banks with a
higher share of exposure to SEBs. The impact of restructuring SEB loans is likely to be limited
as banks are not taking any NPV hits on these loans but would need to provide 2% due to
their classification.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Banks/Financial Institutions
India
Focus shifts to restructuring from slippages. We see sharper focus on restructured
loans in 3QFY12E than on slippages/increases in gross NPLs. Reported NPLs are likely to
remain sequentially stable generally, and in the case of a few banks, surprisingly
positive. Margins are expected to remain healthy but loan growth is likely to moderate
for all banks. NBFCs will continue to drive strong loan growth though NIMs are close to
their nadir, in our view. Most preferred picks: ICICI Bank and Federal Bank among
private banks, PNB among public banks, IDFC and Mahindra Finance among NBFCs.
Restructured loans to increase gradually; NPLs to remain flat qoq
We see focus shifting to restructured loans in the current quarter, especially with large loanadditions
to the CDR cell and reports of various SEBs requesting a revised, elongated payment
schedule. Lower slippages and better recovery trends will keep overall gross NPLs flat qoq. We
expect select banks to report a decline in gross NPL ratios as the focus has shifted to asset quality
from growth. Apart from a 2% provision for fresh restructured loans we don’t see a major impact
on earnings in the quarter from loan-loss provisions.
Flat earnings yoy led by 4% earnings decline for public sector banks
We expect yoy earnings to remain flat (5% qoq) for banks mainly due to weak earnings growth of
public sector banks. Besides, pressure on revenue growth (NII and fee income) is expected to
increase marginally for all banks. We expect 4% yoy (5% qoq growth led by lower provisioning)
decline in earnings for public sector banks and private banks to grow by 15% yoy (6% qoq). Non
interest income is expected to be subdued due to weak fee-income growth. We expect NII growth
of 10% yoy (9% for public sector banks and 15% for private banks). We expect operating
expenses to be stable and the equity portfolio will need higher MTM provision compared with the
bond portfolio in 3QFY12E.
NBFCs are likely to report divergent trends in earnings. While loan growth will remain high, NIMs
are expected to be under pressure and are now close to their nadir. We expect SBI in the public
sector and most private sector banks to post earnings growth of over 12% yoy, aided by lower
base earnings. Stable NIMs, moderate loan growth (about 17%) and capital gains on the sale of
stake in the AMC business will drive IDFC’s earnings growth. Mahindra Finance is likely to deliver
28% growth in core earnings due to strong business traction.
NIMs to remain stable qoq; muted YTD loan growth though alternative channels have increased
We expect NIMs to remain stable in 3QFY12E as banks continue to enjoy pricing power and
interest rates for wholesale deposits have been stable over the past two quarters. We expect NIMs
to be lower by about 10 bps qoq. Loan deposit ratio has been stable at about 74%. YTD growth
in loans for FY2011 (April – December 16, 2011) has been muted at 8% (4% qoq) though
headline growth appears to be higher at about 17% yoy. We note that banks’ investments in CPs
and corporate debentures have increased by 40% and 8% qoq respectively.
Most NBFCs are likely to report a sharp yoy decline in NIMs (50-80 bps). On a qoq basis, we expect
NIMs to decline by 10-20 bps as the rise in interest rates is reflected in loan assets. Incremental
borrowing costs have declined, especially for short to medium term borrowings. Lower competitive
intensity across products and a likely decline in interest rates in the system in 1QFY13E reduces
NIM pressure over the next few quarters.
NBFC: Loan growth remains strong, margins close to their nadir
Divergent trends in PAT. We expect most NBFCs to report divergent trends in reported
earnings. Lower yoy margins for LICHF and accounting treatment of forex losses for PFC
and REC will temper reported PAT.
Margins close to their nadir. We believe NIMs for most NBFCs will bottom out in
3QFY12E. Incremental borrowing costs are now lower than weighted average borrowing
costs especially for NBFCs focused on short to medium term assets/ borrowings. Better
recoveries in 4QFY12E and a likely moderation in interest rates in 1QFY13E are likely to
boost margins, in our view.
Strong loan growth for most. Most NBFCs will continue to deliver strong (20%+)
growth in the loan book due to buoyant retail businesses. Undisbursed approvals will
drive growth for PFC and REC, and IDFC is likely to continue to report moderation (~17%)
in loan growth.
Weaker trends in incremental business. We expect lower approvals for infrastructure
NBFCs. IDFC’s loan growth will be lower, but PFC and REC may not yet be impacted.
Retail NBFCs are likely to report steady growth albeit some weakness in new business.
Slowdown in large housing markets (Mumbai and Delhi), will continue to affect the
businesses of housing finance companies.
Large forex loans likely to tamper earnings for PFC and REC. PFC has proposed to
write back MTM losses reported in 1HFY12. As such, reported earnings are likely to be
higher. We are not clear about the accounting policy that REC will follow and we are not
factoring MTM losses for REC/any likely reversal in our estimates. On a notional basis, we
estimate Rs250 mn MTM losses for REC in 3QFY12E and losses of over Rs4 bn for PFC.
YTD loan growth 8%; infrastructure remains primary source of loan off-take
Loan growth showed signs of moderation despite yoy growth trends showing a strong
headline number of 17-18% yoy. YTD growth (April – December 16, 2011) was 8%, with
infrastructure being the primary source of loan off-take. In line with the busy 2HFY12E, loan
growth improved 4% qoq but is lower than that over the past few years.
As per the last reported data, CD ratio was 74% (flat qoq). Borrowing through external
credit/short-term credit from abroad remained healthy. Banks’ investments in commercial
paper and corporate debentures increased to `268 bn (42% qoq) and `1096 bn (8% qoq),
respectively, indicating partial substitution of credit from the banking channel.
Margins to see limited pressure; expect a stable performance qoq
In 3QFY12E, margins are likely to come under limited pressure as pricing power continues to
favor banks. The liquidity environment has deteriorated in recent weeks and has been higher
than the RBI’s expectation for the quarter. Wholesale and retail deposit rates have been
stable in 3QFY12 and we expect margins to be flat (+/-10 bps qoq) across all banks.
Overall, we expect NII to grow by about 10% yoy (2% qoq) with public sector banks
growing by 9% yoy (1% qoq) and private sector banks by 15% yoy (5% qoq). BoI, Canara
Bank, OBC and Corporation Bank are likely to see fairly weak NII growth in 3QFY12E. We
expect IOB and SBI to have a strong quarter due to a lower base and a sharp increase in
lending rates. Private sector banks are likely to post stable performance.
Treasury gains expected to support non-interest income; fee income to be weak
We expect non-interest income growth to be supported by treasury gains and better
recovery trends but we expect core fee income to remain under pressure. Low loan book
activity, pressure on fee income from third-party distribution (mainly for private banks) are
expected to subdue performance.
In 3QFY12 banks have had better opportunity than they did in previous quarters to make
gains on their investment portfolio. During the quarter, the yield curve closed flat across
tenors despite high volatility. The 10-year, 5-year, 2-year and 1-year bonds are about 8.4%
and have not changed significantly from 2QFY12. However, a sharp drop from highs of 8.9-
9% should provide some opportunity for banks to make trading profits. In 3QFY12 the 1, 2,
5 and 10 year bonds increased by 0, -10, 15 and 10 bps qoq, respectively, against a 10-20
bps increase in 2QFY12.
Slippages and provisions likely to decline qoq; better recovery expected
especially from loans that slipped due to transition exercise
In 3QFY12E we expect slippages and provisions to decline sequentially but outstanding
restructured loans to increase for the industry. Agriculture loans are likely to perform better
in terms of slippages and recoveries as 3QFY12 is a seasonally strong quarter. With banks
strengthening their recovery process, especially after the transition exercise, resulting in
higher NPLs, we expect higher recoveries/upgradation in 3QFY12E. We see limited concern
for private banks for another quarter. Overall increase in gross NPLs is likely to be lower as
recovery trends are expected to remain strong.
Provisions are likely to decline sequentially as in 2QFY12 banks took the charge for transition
related loans and SBI saw higher provisions to meet regulatory requirements. Restructuring is
likely to remain high and would be a key monitorable for all banks – especially banks with a
higher share of exposure to SEBs. The impact of restructuring SEB loans is likely to be limited
as banks are not taking any NPV hits on these loans but would need to provide 2% due to
their classification.
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