Banks/Financial Institutions: Restructuring overshadows stable operating performance : Kotak Securities PDF link

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Restructuring overshadows stable operating performance. Increase in restructured
loans during 4QFY12E will likely overshadow stable business performance of banks. We
expect earnings growth of all banks at >40% yoy (largely due to low base of SBI) led by
NII growth of 18% but tempered by 13% yoy growth in loan-loss provisions. High
borrowings cost will temper the margins of NBFCs though improvement in pricing
power and better collections in 4Q provide a cushion
Strong earnings growth at >40% yoy led by SBI
We expect banks to deliver earnings growth of 43% yoy mainly due to weak base of SBI.
Excluding SBI, we expect earnings growth of 4% yoy (flat qoq). We expect private banks to deliver
17% yoy growth and public banks to deliver 61% yoy (ex-SBI, we expect PAT to decline 5% yoy).
Loan-loss provisions would remain high driving weak earnings performance while revenue growth
would be under pressure (expect NIM to decline qoq). Contribution from treasury will likely be
marginally higher from the previous quarter but sharp rise in interest rates has resulted in an
interest rate curve similar to the previous quarter.  
Expect NIMs to remain under pressure; impact of current liquidity conditions to reflect in 1QFY13E
We expect NIMs to decline marginally in the current quarter as cost of deposits will continue to reprice upwards while lending yields have peaked at previous quarter levels. We expect NIMs to
decline by about 10-15 bps across banks though select banks could deliver improvement led by
lower income de-recognition and better recovery trends. Overall loans grew by 14% YTD (till
March 9, 2012) while deposits grew by 13% YTD. Activity levels in the last few weeks are likely to
remain strong thereby elevating loan growth to 16-17% in March 2012E.  
Credit costs to remain high; focus to continue on restructured loans as compared to slippages
We expect credit costs to remain high (similar to 3QFY12 at 110 bps) for the quarter due to aboveaverage slippages and standard/NPV provisions for restructured loans. Recoveries from small-ticket
loans that slipped in 1HFY12 on account of migration will likely improve. However, the Street’s
focus would continue to remain on restructured loans as well as slippages from large accounts.
Select SEBs and aviation sector will likely get restructured in the current quarter which should
result in increase in overall restructured loans for public banks. Reported trends from previous
quarters on slippages and restructured loans are likely to be maintained for private banks.
NBFCs: Loan growth moderates, pricing power and seasonal trends cushion margins
We expect most NBFCs to report almost stable NIMs qoq. Borrowings cost was high during the
quarter though better pricing power likely provided respite to infrastructure finance companies
while seasonal improvement in collections cushions NIM of retail finance companies.
We expect loan growth to moderate to 23-25% for most NBFCs from 25-28% in 3QFY12 likely
due to a higher base. IDFC (25%) and MMFS (44%) will likely report the highest loan growth.
We believe that lower regulatory overhang and decline in interest rates will drive business for
NBFCs in 2013E. Slackness in new project activity is negative for infrastructure NBFCs; gold loan
NBFCs stocks will likely continue to face overhang of recent regulations and the RBI’s stiff stance
on the segment.