Banks & NBFCs 3QFY15E Results Preview :: HDFC Securities

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Treasury led earnings; no material change in other operating metrics
Treasury gains to propel earnings
 We expect banks under our coverage to report PAT growth of 27%
YoY (highest in the last nine quarters) vs. 17/7% YoY growth seen in
2/1QFY15.
 Strong earnings growth of 36% YoY (despite elevated provisioning) for
PSBs is expected to be driven by treasury gains, which is likely to form
~8% of operating profit vs. 4/6% YoY/QoQ. We expect PSBs like UNBK
(50%), PNB (62% QoQ) & SBIN (56%) to report high earnings growth.
 PVT Banks are expected to report stable earnings growth of ~16% YoY
vs. 18/19% in 2/1QFY15 led by stable risk adjusted NIM. Within PVT
banks, we expect DCB, IIB & YES to report +25% PAT growth.
Marginal NIM improvement for PSBs
 On the back of incrementally lower funding cost (decline in wholesale
deposit rates) and better liquidity conditions during 3Q, we expect
banks to report steady NIMs (with marginal positive bias). Further,
our interaction with various banks indicate relatively lower additions
to impaired assets, which shall further aid NIMs.
 Within PSBs, we expect QoQ NIM improvement for CBK, UNBK & PNB.
However with subdued loan growth, we expect an NII rise of merely
9% YoY vs. 10/14% YoY reported in 2/1QFY15 for PSBs with high
growth seen in UNBK, BOB, ALBK.
 Amongst PVT Banks, we expect a NIM improvement for YES (fund
raise & decline in wholesale rates). However, for the remaining PVT
Banks, we expect NIMs to remain flat sequentially. PVT Banks’ NII is
expected to grow 18% YoY, in line with the earlier trend with strong
growth seen in IIB, AXSB, YES.
Weak Businesstrends to continues
 Systemic credit growth have remain muted at ~11% YoY (merely 2.6%
QoQ), in line with the trend seen in 2Q. Muted growth in 3Q dash
away the market expectation of growth picking up in the near term.
 Slowdown is more pronounced in PSBs given their loan mix tilt
towards the corporate segment, where loan demand is still sluggish.
We expect the loan book for PSBs to grow 11% with relatively better
growth seen in BOB, BOI and PNB.
 Given the more diversified loan book and high share of retail loans,
we expect loan growth of 17% for PVT Banks with strong growth in
IIB, YES, FB and AXSB.
Mixed NPL trend within banks; provisioning cost to remain elevated
 Our interactions with banks suggest a mixed trend on the asset
quality front. While banks like CBK, UBNK & FB guided for QoQ lower
stress formation, banks like BOI & ALBK expect asset quality pressure
to continue.
 We believe slippages from the normal course of business are likely to
decline incrementally. However, slippages from failed restructuring
cases would continue to keep overall stress additions at elevated level
for the next couple of qtrs. Thus, we continue to factor an elevated
non-tax provisioning cost.
 For PSBs, we expect slippages ratio of 2.8% vs. 3.0/3.2% seen in
2/1QFY15 and for PVT Banks we factor in 1.6% vs. 1.7/1.3%. We
expect non-tax provisioning cost of 130bps vs. 140/110bps in
2/1QFY15 for PSBs and 80bps vs. 95/70bps for PVT Banks.
Outlook
 The recent regulatory relief: (a) raising long term infra bonds (July-
14) with measured exemption of regulatory requirements
(CRR/SLR/PSL) and (b) flexible structuring guidelines are expected to
ease the concerns of ALM and incremental stress formation. PSB are
the major beneficiaries of the above guidelines given their large infra
book and elevated proportion of stressed assets.
 The banking index has outperformed the broader markets over the
trailing six months. We believe the outperformance is sustainable
given the expected improvement in marcos, expected benign interest
rates regime and a continued helping hand from the regulator (esp.
for PSBs).
 Maintain BUY on SBIN, BOB, PNB & OBC amongst PSBs and AXSB,
ICICIBC, FB & DCB amongst PVT Banks.

LINK
http://www.hdfcsec.com/Share-Market-Research/Research-Details/StockReports/3010601