April 10, 2015 36 Jan‐Mar 2015 Earnings Preview Nitin Kumar [email protected]+91‐22‐6632 2236 Pritesh Bumb [email protected]+91‐22‐6632 2232 Top picks ICICI Bank HDFC Bank State Bank of India Yes Bank Banking & Financial Services It’s a challenging quarter, particularly for PSUs: With loan growth remaining elusive and asset quality pressures persisting, we believe that it is going to be a challenging quarter for the financial services sector, especially for the state owned banks. Several banks have already guided for a spike in fresh restructuring, while slippages may moderate for PSUs against a high base, but nevertheless will remain elevated. On the macro front, bond yields have shown healthy easing, crude price has fallen sharply, inflation trajectory appears under control but demand/growth environment remains weak. Treasury gains which helped support earnings in Q3FY15 will also be modest as bond yields have largely been stable. While we remain constructive on the sector from a one‐year perspective, we believe that near‐term stock performance would depend more on an on‐ground recovery. We expect modest uptick in credit growth in FY16E as the credit growth to nominal GDP multiple is most levered to industrial growth, which is likely to improve only gradually. Also, continued acts of de‐leveraging and credit substitution will likely affect overall growth. We expect RBI to continue with calibrated rate easing as there are near‐term risks from recent unseasonal rains and rising possibility of El‐Nino which can again drive up inflation. Earnings growth to improve from H2FY16E: PPOP growth has been slowing for all banks including private sector and we expect economic recovery to be fairly gradual. We believe that PSU banks will fully provide for employee provisions (wage, pension, gratuity & mortality) over H1FY16 as they receive inputs from the actuaries and will stage a modest recovery over H2FY16E. We also estimate credit cost to decline by ~25bps each over next two years for SOE banks which will further aid earnings growth. Q4FY15 Preview: (1) Private Banks – PPoP growth is likely to moderate further as loan/fee growth remains soft, while margins are unlikely to expand (except for IIB & YES). We expect controlled deterioration in asset quality (particularly ICICIBC which has already guided for elevated trend in stressed asset formation). However, any negative asset quality shocks are highly unlikely. (2) PSUs ‐ Earnings trend to remain muted as revenue progression remains weak, while elevated opex/credit cost further act as a drag. Margins are expected to remain stable at current low levels and are likely to remain there with prospects of rate cut over Q1FY16. Most bank’s guidance (UNBK, PNB, BOI) on asset quality is concerning on both fresh slippages and the NPL formation from restructured assets as restructuring deadline ended in Q4FY15. Treasury gains will also be modest unlike the previous quarter, given stable bond yields during the quarter. (3) NBFCs ‐ Although wholesale rates have eased significantly, loan growth is yet to pick up meaningfully and will thus delay any material improvement in margins. LICHF will report some NIM uptick (incremental spreads have already improved), SHTF’s asset quality will plateau. MMFS to report better asset quality trends, given a seasonally strong quarter, though macro hasn’t improved much.
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Banking & Financial Services: Q4FY15 Result Preview
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Banking & Financial Services It’s a challenging quarter, particularly for PSUs: With loan growth remaining
elusive and asset quality pressures persisting, we believe that it is going to be a challenging quarter for the financial services sector, especially for the state owned banks. Several banks have already guided for a spike in fresh restructuring, while slippages may moderate for PSUs against a high base, but nevertheless will remain elevated. On the macro front, bond yields have shown healthy easing, crude price has fallen sharply, inflation trajectory appears under control but demand/growth environment remains weak. Treasury gains which helped support earnings in Q3FY15 will also be modest as bond yields have largely been stable. While we remain constructive on the sector from a one‐year perspective, we believe that near‐term stock performance would depend more on an on‐ground recovery.
We expect modest uptick in credit growth in FY16E as the credit growth to nominal GDP multiple is most levered to industrial growth, which is likely to improve only gradually. Also, continued acts of de‐leveraging and credit substitution will likely affect overall growth. We expect RBI to continue with calibrated rate easing as there are near‐term risks from recent unseasonal rains and rising possibility of El‐Nino which can again drive up inflation.
Earnings growth to improve from H2FY16E: PPOP growth has been slowing for all banks including private sector and we expect economic recovery to be fairly gradual. We believe that PSU banks will fully provide for employee provisions (wage, pension, gratuity & mortality) over H1FY16 as they receive inputs from the actuaries and will stage a modest recovery over H2FY16E. We also estimate credit cost to decline by ~25bps each over next two years for SOE banks which will further aid earnings growth.
Q4FY15 Preview:
(1) Private Banks – PPoP growth is likely to moderate further as loan/fee growth remains soft, while margins are unlikely to expand (except for IIB & YES). We expect controlled deterioration in asset quality (particularly ICICIBC which has already guided for elevated trend in stressed asset formation). However, any negative asset quality shocks are highly unlikely.
(2) PSUs ‐ Earnings trend to remain muted as revenue progression remains weak, while elevated opex/credit cost further act as a drag. Margins are expected to remain stable at current low levels and are likely to remain there with prospects of rate cut over Q1FY16. Most bank’s guidance (UNBK, PNB, BOI) on asset quality is concerning on both fresh slippages and the NPL formation from restructured assets as restructuring deadline ended in Q4FY15. Treasury gains will also be modest unlike the previous quarter, given stable bond yields during the quarter.
(3) NBFCs ‐ Although wholesale rates have eased significantly, loan growth is yet to pick up meaningfully and will thus delay any material improvement in margins. LICHF will report some NIM uptick (incremental spreads have already improved), SHTF’s asset quality will plateau. MMFS to report better asset quality trends, given a seasonally strong quarter, though macro hasn’t improved much.
April 10, 2015 37
Jan‐Mar 2015 Earnings Preview
Overall, we expect ~8.4% YoY PAT growth for the sector, with ~14% for Pvt Banks
and ~2% for PSBs.
Asset quality – pressures to intensify: Pressure on asset quality is expected to
increase as most PSU banks guided for higher restructuring and slippage trend, particularly from existing pool of restructured assets. Also, this being the last
quarter to avail lower provisioning benefits on fresh restructuring, most banks will be more forthcoming in restructuring troubled accounts, in our view. PSBs had resorted to high sale of NPA to ARCs in FY14 which has been lower in
9MFY15; however, we expect some NPAs to be sold in Q4FY15.
Our key stock ideas:
ICICI Bank (BUY): (+) Like Axis, risk in power/large corporate book low, especially in asset class with high loss, given default (+) Retail SME portfolio stable despite
significant stress. (+) Subsidiaries are gaining scale and their contribution to overall profitability is improving. (+) Relaxation in FDI limit in insurance is a positive trigger. (‐) On a relative basis, asset quality risks appear high due to
lumpy exposure (‐) PPOP moderation to continue despite better fee growth as there is limited room for further margin expansion.
HDFC Bank (BUY): (+) Best placed to overcome current slowdown – Both opex
and credit cost flexibility high. (+) Fixed rate book to aid margins, while benign earning base will help bank generate ~25% earnings CAGR over FY16‐17E (+)
Asset quality holding up (‐) Slowing PAT growth and uptick in credit cost.
Yes Bank (BUY): (+) Earnings traction to remain strong led by loan growth
recovery and improving margins (higher cut‐off balance limit for 7% SA rate) (+) Asset quality remains stable with strong coverage ratio (+) Continued traction in CASA mix and pick‐up in retail loan growth (+) Strongly capitalized to benefit
from economic turnaround. We are rolling forward our valuations to FY17E with a revised PT of Rs930 (from Rs815), which corresponds to 2.5x FY17E ABV.
Federal Bank (BUY): (+) Stability in large corporate portfolio as well after steady
performance on SME/Retail (+) Slower branch expansion to aid in cost optimization (+) Loan growth to improve after an year of consolidation, while
management’s focus on broad‐based fee income yields results (‐) Growth still below par and hence, leveraging up will take longer.
PSU banks ‐ Prefer SBI on cleaner Balance sheet and healthy earnings: (+) PPOP
growth likely to improve on pick‐up in loan growth and continued benefits from cost optimization. (+) Asset quality is showing an improving trend over past two
quarters and we estimate credit cost to decline over FY16‐17E. (+) Strong liability franchise + reasonable valuations (+) SBI is strongly capitalized and has lower restructuring levels. (‐) Corporate book riskier v/s private peers. (‐) Under‐
provisioned B/S + limited P&L support in this credit cycle (low recoveries/upgrades).
Shriram/LICHF preferred NBFC picks: (+) SHTF: Profitability has bottomed out –
Initial signs of a pick‐up in loan growth, while credit cost likely to inch lower in H2FY15 (+) Margins likely to expand as funding cost has declined (+) Regulatory
overhang on NPL recognition is now done away with – Recent up‐move limits risk‐reward though (2) LICHF: Will be beneficiary of lower rates and strong competitive advantage, given bank’s inability to lend below base rate +
reasonable valuations.
April 10, 2015 38
Jan‐Mar 2015 Earnings Preview
Q4 Results Preview (Rs m) – PPOP trends remain weak; credit cost to increase for both PSU & Pvt Banks
Jan‐Mar'15 Jan‐Mar'14 YoY gr. (%) Oct‐Dec'14 QoQ gr. (%)
NII 470,064 422,329 11.3 451,657 4.1
PPP 370,783 345,401 7.3 344,967 7.5
PAT 164,405 150,023 9.6 141,333 16.3
Consolidated Sectoral Data (Financial Services)
Quarterly Table (Rs m)
Jan‐Mar'15 Jan‐Mar'14 YoY gr. (%) Oct‐Dec'14 QoQ gr. (%)
NII 54,513 47,417 15.0 48,842 11.6
PPP 52,057 49,261 5.7 46,792 11.3
PAT 32,016 29,568 8.3 26,387 21.3
Note: NII, PPP and PAT numbers are arrived by totaling corresponding numbers of all companies under our coverage in this sector.
Key Figures (Rs m)
2015E 2016E 2017E
NII 1,821,812 2,125,786 2,511,529
Growth (%) 12.8 16.7 18.1
PPP 1,389,199 1,641,892 1,969,076
Growth (%) 12.7 18.2 19.9
PAT 638,580 792,094 972,908
Growth (%) 13.6 24.0 22.8
PE (x) 17.2 13.8 11.3
Key Figures (Rs m)
2015E 2016E 2017E
NII 195,589 232,446 274,874
Growth (%) 10.0 18.8 18.3
PPP 179,129 210,448 248,965
Margin (%) 91.6 90.5 90.6
PAT 112,119 135,141 158,534
Growth (%) 4.7 20.5 17.3
PE (x) 26.2 21.8 18.6
Jan‐Mar 2015 Earnings Preview
April 10, 2015 134
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