India Financials Gradual recovery to unfold – Prefer stock specific approach Nitin Kumar [email protected]+91-22-66322236 Pritesh Bumb [email protected]+91-22-66322232 Click to edit Master title style Lilladher Prabhudas January 2015 Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report.
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India Financials
Gradual recovery to unfold – Prefer stock specific approach
Click to edit Master title style LilladherPrabhudas January 2015
Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision.
Please refer to important disclosures and disclaimers at the end of the report.
LilladherPrabhudas Contents
1/2/2015 2
Page No.
Companies
Axis Bank 47
HDFC Bank 50
ICICI Bank 53
IndusInd Bank 56
Kotak Mahindra Bank 59
YES Bank 62
Bank of Baroda 65
Bank of India 68
Punjab National Bank 71
State Bank of India 74
Union Bank of India 77
Federal Bank 80
Jammu & Kashmir Bank 83
South Indian Bank 86
HDFC 89
IDFC 92
LIC Housing Finance 95
M&M Financial Services 98
Shriram Transport Finance Company 101
Page No.
Gradual recovery to unfold – Prefer stock specific approach 3
Investment Summary 4
Top-Down Strategy 5
Our key stock ideas 6
Key changes in our earnings estimates 7
PL v/s Consensus estimates 8-9
Macros – Some improvement at the margin 11-13
Rating agency actions – Upgrades trend is firming up 14
Sectoral Deployment of Credit has been overall weak 15-16
GDP multiplier has come-off – revival in industrial growth a must 17-18
Treasury gains – Could now move in bank’s favour 19-20
Net Interest Margins - Fixed rate books to be better placed 21-22
Fees – Slowdown everywhere, we expect a gradual recovery 23
Regulations:- RBI maintains its accommodative stance 24
Capital - Basel III concerns only on some PSU banks ! 25-26
LilladherPrabhudas Gradual recovery to unfold – prefer stock specific approach
• Bank nifty has outperformed the market by ~10% over past six months. While we remain constructive on the sector, we believe that further stock movement would depend more on on-ground recovery rather than pure optimism.
• We expect economic recovery to be fairly gradual unlike the previous up-cycle (2005-2008) when the domestic recovery coincided with a period of strong global growth. We expect GDP growth to average ~6.25% over next two years unlike 8.9% average growth between 2005-2008.
• We thus estimate credit cost to improve by ~25bp each over next two years for SOE banks and estimate earnings CAGR of ~24% for the sector aided by improved performance of PSU banks, against a low base. We note that despite this strong earnings traction the RoAs of most PSU banks (except SBI & PNB) would remain around 0.7% and would be significantly lower than previous up-cycles.
• With significant decline in G-sec and corporate bond yields the prospects of treasury gains has improved. However the total quantum of such treasury gains will be small in comparison to the gains made in previous rate easing cycles (please refer slide 20 for details).
• We believe that revival in industrial growth is the key for any sustained improvement in credit growth. Our analysis shows that credit growth to nominal GDP multiplier is most levered to industrial growth. We estimate credit growth to improve to 15% in FY16E as which corresponds to credit growth to nominal GDP multiplier of 1.5x (1.3x average over past four years).
• Our sensitivity analysis indicates that any sharper than expected turnaround in economy would result in ~15% rise in our PTs. We note that this is not a blue sky scenario but a possible outcome if the macro scenario were to improve at a rate, slightly better than expected.
• Stock ideas: We prefer ICICIBC/HDFCB among large private banks; SHTF/LICHF/HDFC amongst NBFCs, SBI/BOB amongst PSUs and Federal bank among small caps. MMFS/PNB are key avoids.
1/2/2015 3
LilladherPrabhudas Investment Summary
• Macros improving at the margin but we expect only a gradual recovery in GDP growth: PPOP growth has been slowing for all banks including private names and we do not expect trend to reverse sharply over next 1-2 qtrs.
• Rate Cycle: We expect a calibrated easing in rate cycle from 4Q FY15 onwards however extent of bond gains will be much lower than the previous cycles. BOI, CBK, PNB are better placed amongst large banks to benefit from decline in bond yields.
• Credit cycle – Industrial growth is the key; modest uptick expected for FY16: 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, some acts of de-leveraging and credit substitution will likely affect overall growth.
• Our revised PTs are based on Sep-16 book and some higher multiple factoring in potential improvement in economic growth/investment cycle. We prefer ICICIBC/HDFCB among large private banks; SHTF/LICHF/HDFC amongst NBFCs, SBI/BOB amongst SOE banks and Federal bank among midcap banks. MMFS/PNB are key avoids.
1/2/2015 4
India Financials – Sector Valuations - ICICI/HDFCB top private picks; SBI/BOB top PSU banks and Federal in Midcap banks
Source: Bloomberg, Company Data, PL Research estimates
LilladherPrabhudas Top-Down Strategy
• Credit growth to improve gradually; industrial growth revival is the key: Credit growth trends continue to remain sluggish despite robust agriculture (20% YoY) and retail loan growth. Muted trends in capex activity, reduced cost of hedged overseas borrowings and moderation in working capital requirements (steep fall in commodity prices) has affected the industrial credit growth. We estimate ~15% credit growth for FY16E factoring in some improvement in industrial/Infra off take.
• PPOP growth to revive; margins are close to peaking out for large private banks: With gradual revival in loan/fee growth we expect PPOP growth to improve for the sector. NII growth will likely follow loan growth as margins have likely peaked out (NIMs for HDFC Bank and Axis Bank are at multiyear peak) while IIB and YES may report margin expansion going forward. PSU banks PPOP growth to also recover aided by bond gains but we do not expect core PPOP/assets to recover meaningfully.
• Credit cycle - No easy fix this time; relapse risk from restructured portfolio remains a worry: We are finally seeing some acts of de-leveraging which is necessary to continue but we expect upgrade/recovery to take longer in this cycle than last one (domestic issues in this cycle v/s commodity related risks in the last one). Nearly ~50% of total restructuring via CDR route has happened in past two years which poses threat to asset quality going forward as these assets comes out of moratorium. On two-year lag basis the CDR failure rate has already increased to 44% on the basis of number of cases and 25% on amount-wise basis.
• Regulator continues with its supportive stance – positive for PSUs: RBI has been more accommodative off-late in banking regulations with recent relaxations in re-financing of Infra loans, pushing out dynamic provisioning, shift in BASEL III transition and payment reschedulement of existing infrastructure loans. Most of these relaxations have brought a large relief for PSU banks.
1/2/2015 5
LilladherPrabhudas Our key stock ideas
• Axis Bank (BUY): (+) Analysis indicates that risk in power/large corporate book is lower than perceived (+) CASA especially CA mobilization is best in class and to some extent under-appreciated (+) Valuations reasonable at 2.2x Sep-16 book. (-) PPOP growth has moderated significantly.
• 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 in spite of better fee growth expected as there is limited room for further margin expansion.
• HDFCB (BUY): (+) Best placed to overcome current slowdown – Both opex and credit cost flexibility high. (+) Fixed rate book to aid margins in 2H15 while benign earning base will help bank generate ~25% earnings CAGR over FY15-17E (+) Asset quality holding up (-) Slowing PAT growth and retail cycle may not remain as benign.
• 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-basing fee income yields results (-) Growth still below par and hence leveraging up will take longer.
• PSU banks - Macro turning conducive – Prefer SBI & BOB on cleaner Balance sheet and BOI on valuations: (-) PPOP growth much worse than private banks (lower NIMs/ loan growth / pension costs worries). (+) Prospects of healthy treasury gains and gradual turnaround in asset quality. (-) Large corporate book riskier v/s private peers. (-) Under-provisioned B/S + limited P&L support in this credit cycle (low recoveries/upgrades) (-) Capital constraints. (+) Liability franchise + valuations (+) SBI better placed on pensions, project book and lower restructuring – Will outperform as slippages levels improve.
• Shriram/LICHF still preferred; Sell MMFS: (+) SHTF: Profitability has bottomed out – Initial signs of a pick up in loan growth while credit cost likely to inch lower in 2H15 (+) 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 in 2H15 + Reasonable valuations (3) MMFS: Growth and asset quality disappointment likely to continue – Valuations expensive while AUM growth is likely to remain muted in the near term.
1/2/2015 6
LilladherPrabhudas Key changes in our earnings estimates
1/2/2015 7
Change in earnings estimates
We estimate earnings CAGR of ~24% for private banks vs ~25% growth for PSU Banks. This will be led by gradual revival in loan growth and moderation in provisioning expenses (pls. see slide 32 for details) as we estimate margins to remain stable. NBFCs on other hand are estimated to deliver earnings CAGR of ~24% over FY15-17E.
Source: Company Data, Bloomberg, PL Research estimates
LilladherPrabhudas PL v/s Consensus estimates
Source: Company data, Bloomberg, PL Research estimates
PL versus consensus EPS estimates
• Our earnings estimates for private banks are marginally higher than consensus, except for Kotak Bank where in we are 5% lower.
• We are significantly higher than consensus (>10%) in our earnings estimate for BOI and Union bank where in our implied FY15-FY17E earnings CAGR stand at 33% and 27% respectively.
• We note that despite this the FY17E RoA for BOI and UNBK would still remain modest at 0.68% and 0.67% respectively.
• Amongst NBFCs we are higher than consensus on LICHF where in we expect spreads to improve from low-base while lower provisioning requirement (aided by reversals) would keep a check on credit cost.
• We are also slightly lower than consensus on MMFS and SHTF where in we expect CV cycle to recover only gradually and the credit cost could swing sharply based on the decision management takes on compliance with the revised NBFC guidelines, recently published by the RBI.
1/2/2015 8
Consensus EPS PL EPS
Private banks
Axis Bank 36.7 37.7 2.9%
Federa l Bank 13.8 13.4 -2.9%
HDFC Bank 52.9 51.7 -2.3%
ICICI Bank 23.0 23.4 1.8%
Indus Ind Bank 43.0 44.5 3.5%
ING Vysya Bank 51.1 51.6 1.1%
J&K Bank 25.5 25.9 1.7%
Kotak Bank 29.3 27.8 -5.1%
South Indian Bank 4.6 4.9 5.4%
Yes Bank 58.1 58.5 0.6%
SOE banks
Bank of Baroda 148.6 138.7 -6.6%
Bank of India 61.3 67.6 10.2%
Punjab National Bank 155.3 149.1 -4.0%
SBI 23.5 22.3 -5.0%
Union Bank 39.8 48.7 22.5%
NBFCs
HDFC 46.4 44.4 -4.2%
IDFC 12.3 12.3 -0.2%
LICHF 35.2 37.1 5.3%
M&M Financia l Services 20.6 19.6 -4.9%
Shriram Transport Finance 76.3 73.5 -3.6%
% differenceFY16E
LilladherPrabhudas Trends in earnings change by consensus
Source: Bloomberg, PL Research estimates
Consensus change in earnings over past 1m, 3m and 6m
• Consensus earnings have moved in a narrow band with some downward bias, over past 1m, 3m and 6m. While private banks earnings have shown marginal moderation in earnings over past few months the earnings decline trend for PSU banks seems to have abated now.
• Consensus earnings implies an earnings CAGR of ~24% for private and PSU banks alike vs ~19% earnings growth for NBFCs, in our coverage universe.
• ING Vysya, J&K Bank and South Indian Bank have seen the maximum change in consensus earnings in past six months amongst private banks. While the earnings change for PSU banks have remained quite uniform.
• Amongst NBFCs IDFC and MMFS have reported maximum cut in earnings – 16%, 10% respectively over 6 month period owing to growth slowdown and higher provisioning estimates.
1/2/2015 9
1 mth 3 mth 6 mth
Private banks
Axis Bank 30.7 36.7 0.3 0.9 2.3
Federa l Bank 11.5 13.8 - 0.7 2.4
HDFC Bank 42.9 52.9 (0.1) (1.3) (2.7)
ICICI Bank 19.5 23.0 0.2 0.5 1.3
Indus Ind Bank 34.1 43.0 0.1 1.6 3.7
ING Vysya Bank 39.5 51.1 (0.2) (1.8) (6.0)
J&K Bank 18.4 25.5 (9.1) (11.6) (17.5)
Kotak Bank 23.4 29.3 1.3 4.2 5.0
South Indian Bank 3.7 4.6 0.3 (5.4) (9.7)
Yes Bank 48.2 58.1 (0.2) 0.7 (5.7)
Private banks avg (0.7) (1.2) (2.7)
Private banks avg excl. J&K Bank 0.2 - (1.1)
SOE banks
Bank of Baroda 122.4 148.6 (0.6) (1.5) (0.1)
Bank of India 50.0 61.3 (0.1) (2.3) (3.8)
Punjab Nat. Bank 121.5 155.3 (0.1) (4.7) (2.6)
State Bk of India 18.7 23.5 (4.4) (4.1) (3.6)
Union Bank 32.7 39.8 0.4 (0.0) 4.8
SOE banks avg (0.9) (2.5) (1.1)
NBFCs
HDFC 39.5 46.4 0.2 (0.7) (2.3)
IDFC 11.6 12.3 (1.3) (6.2) (16.1)
LICHF 29.3 35.2 0.7 0.2 (2.5)
M&M Financia l Services 16.4 20.6 (0.4) (1.0) (10.8)
Shri ram Transport Finance 61.5 76.3 (0.4) (0.9) (3.7)
NBFC avg (0.2) (1.7) (7.1)
FY15E FY16EFY16E EPS - % change
LilladherPrabhudas Stock performance of PL coverage universe
LilladherPrabhudas Rating agency actions – Upgrades trend is firming up
• Rating-action-ratio (ratio of rating upgrades plus affirmations to downgrades) has surpassed one for the first time in past four years.
• More importantly the rating downgrade rate has declined significantly during 2HFY14.
• Average corporate rating which has been drifting lower over past several years has stabilized, though still remains below investment grade as large number of smaller companies are getting rated at the bottom of the pyramid.
Source: CRISIL, PL Research
Source: CRISIL, PL Research
Rating transition stabilizes after successive deterioration over past yrs
…upgrade rate exceeded downgrades for the first time in past 3 years
Source: CRISIL, PL Research
Rating Action Ratio has crossed one as…
1/2/2015 14
0.00
0.05
0.10
0.15
0.20
0.25
0.30
0.35
0.40
AAA AA A BBB BB B C D
Mar-10 Mar-12 Mar-14 Sep-14
-
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
1.80
0%
2%
4%
6%
8%
10%
12%
14%
FY95
FY96
FY
97
FY98
FY99
FY
00
FY01
FY02
FY03
FY04
FY
05
FY06
FY07
FY
08
FY09
FY10
FY11
FY12
FY
13
FY14
1H15
IIP GDP RAR (RHS)
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
1H 0
9
2H
09
1H 1
0
2H 1
0
1H 1
1
2H
11
1H
12
2H 1
2
1H 1
3
2H 1
3
1H
14
2H 1
4
1H 1
5
Downgrade rate Upgrade rate
LilladherPrabhudas Sectoral Deployment of Credit has been overall weak
• Systemic credit growth is running weak at ~12% YoY led by muted loan demand from industry.
• Agriculture growth has been particularly strong at 20% YoY while retail loan growth has picked up further to ~19% YoY.
• Industry offtake has been weak especially capex heavy industries. Also, lower subsidy burden has reduced Petroleum credit offtake lower.
• We expect credit growth to improve to 15.5% YoY for FY16E as we build in some improvement in industrial growth over next year even as retail and agriculture growth maintains steady trends.
Source: RBI, PL Research
Source: RBI, PL Research
Agri growth has surprised but has lower weight in overall growth
Slight pick-up in Industrial credit offtake from bottom
Source: RBI, PL Research
Retail growth has been holding steady
1/2/2015 15
4.0%
9.0%
14.0%
19.0%
24.0%
Feb
-13
Mar
-13
Apr
-13
May
-13
Jun
-13
Jul-
13
Aug
-13
Sep
-13
Oct
-13
Nov
-13
Dec
-13
Jan
-14
Feb
-14
Mar
-14
Apr
-14
May
-14
Jun
-14
Jul-
14
Aug
-14
Sep
-14
Oct
-14
Nov
-14
Industry Retail Services Agri
5.0%
7.0%
9.0%
11.0%
13.0%
15.0%
17.0%
19.0%
Sep
-12
Nov
-12
Jan
-13
Mar
-13
May
-13
Jul-
13
Sep
-13
Nov
-13
Jan
-14
Ma
r-1
4
May
-14
Jul-
14
Se
p-1
4
Nov
-14
Overall Retail
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
Sep
-11
Dec
-11
Mar
-12
Jun-
12
Sep
-12
Dec
-12
Mar
-13
Jun-
13
Sep
-13
Dec
-13
Ma
r-1
4
Jun-
14
Sep
-14
Services Industry
LilladherPrabhudas Sectoral Credit offtake – Industry offtake has been
extremely weak especially Capex heavy
Source: : RBI, PL Research
Source: RBI, PL Research
Industry growth has declined led by cement and metals segments
Vehicle loans pick up has slowed down after improving in Oct’14
Source: RBI , PL Research
Banks restraint in lending to power is witnessed in credit offtake
Source: : RBI, PL Research
Both Industry and non-infra industry growth has been subdued
1/2/2015 16
0.0%
4.0%
8.0%
12.0%
16.0%
20.0%
Sep
-12
Oct
-12
Nov
-12
Dec
-12
Jan
-13
Feb
-13
Mar
-13
Apr
-13
May
-13
Jun
-13
Jul-
13
Aug
-13
Sep
-13
Oct
-13
Nov
-13
Dec
-13
Jan
-14
Feb
-14
Mar
-14
Apr
-14
May
-14
Jun
-14
Jul-
14
Aug
-14
Sep
-14
Oct
-14
Nov
-14
Industry Industry (Ex-Infra)
5%
10%
15%
20%
25%
30%
Feb
-13
Ma
r-1
3
Apr
-13
May
-13
Jun
-13
Jul-
13
Aug
-13
Sep
-13
Oct
-13
Nov
-13
Dec
-13
Jan
-14
Fe
b-1
4
Mar
-14
Apr
-14
May
-14
Jun
-14
Jul-
14
Aug
-14
Sep
-14
Oct
-14
Nov
-14
Cement Metals Textiles Capex heavy
10.0%
15.0%
20.0%
25.0%
30.0%
Feb
-13
Mar
-13
Apr
-13
May
-13
Jun
-13
Jul-
13
Aug
-13
Sep
-13
Oct
-13
Nov
-13
Dec
-13
Jan
-14
Feb
-14
Mar
-14
Apr
-14
May
-14
Jun
-14
Jul-
14
Aug
-14
Sep
-14
Oct
-14
Nov
-14
Vehicle Loans Housing
5%
10%
15%
20%
25%
30%
35%
Feb
-13
Ma
r-1
3
Apr
-13
May
-13
Jun
-13
Jul-
13
Aug
-13
Sep
-13
Oct
-13
Nov
-13
Dec
-13
Jan
-14
Fe
b-1
4
Mar
-14
Apr
-14
May
-14
Jun
-14
Jul-
14
Aug
-14
Sep
-14
Oct
-14
Nov
-14
Infra ex telecom Roads Power
LilladherPrabhudas Sector Outlook– Credit growth pick-up to remain
modest
Source: RBI, PL Research
15.5% credit growth in FY16: Factoring in some revival in economy
Source: Bloomberg, RBI, PL Research
Credit growth to GDP multiplier to increase as industrial growth picks-up
Source: Bloomberg, RBI, PL Research
Credit growth including CPs is a tad higher at ~11% – Gap with deposit growth though has narrowed
1/2/2015 17
9.0%
11.0%
13.0%
15.0%
17.0%
19.0%
Se
p-1
2O
ct-1
2N
ov-
12
Dec
-12
Jan
-13
Fe
b-1
3M
ar-1
3A
pr-1
3M
ay-…
Jun
-13
Jul-
13A
ug-1
3Se
p-1
3O
ct-1
3N
ov-1
3D
ec-
13
Jan
-14
Feb
-14
Ma
r-1
4
Apr
-14
Ma
y-…
Jun
-14
Jul-
14A
ug
-14
Sep
-14
Oct
-14
No
v-1
4D
ec-1
4
Adj Credit for CPs Credit growth
LilladherPrabhudas GDP multiplier has come-off – revival in industrial
growth a must for sustained recovery in credit growth
Source: Bloomberg, RBI, PL Research Estimates
GDP multiplier across GDP/credit growth segments • GDP multiplier is most levered to industrial growth followed by agriculture growth and services growth respectively.
• The gradual decline in credit growth to nominal GDP multiplier can be attributed to the falling share of agriculture segment in the total GDP mix and modest trend in industrial growth besides other extraneous factors (credit substitution, overseas borrowings, etc).
• We estimate credit growth to recover to 15.5% in FY16E as economic recovery takes hold while retail and agriculture segment continue to report steady trends.
• This corresponds to a credit growth to nominal GDP multiplier of 1.5x vs average of 1.3x over past four years.
1/2/2015 18
Agri GDP growth (%) Agri credit growth (%) Multiplier
2009 0% 24% 263.91
2010 1% 23% 28.24
2011 8% 16% 2.04
2012 4% 13% 3.64
2013 2% 8% 4.03
2014 5% 13% 2.81
3.1
Industry GDP growth (%) Industry credit growth (%) Multiplier
2009 4% 21% 4.71
2010 9% 24% 2.66
2011 9% 23% 2.51
2012 3% 20% 5.82
2013 2% 15% 7.17
2014 2% 13% 8.20
5.9
Services GDP growth (%)Retail + Services credit growth (%) Multiplier
2009 10% 15% 1.49
2010 11% 9% 0.82
2011 10% 21% 2.17
2012 8% 14% 1.67
2013 7% 13% 1.87
2014 7% 16% 2.26
2.0
Average of last four years
Average of last four years
Average of last four years
LilladherPrabhudas Treasury gains – Could now move in bank’s favour
• With significant decline in G-sec and corporate bond yields the prospects of treasury gains has improved for the banking sector.
• The RBI has also reduced the SLR limit to 22% owing to poor credit demand yet the bank’s SLR portfolio remains high at ~28% of total NDTL. This will enable banks to make higher treasury gains going forward as they move securities from HTM to AFS, particularly as RBI begins to ease rate cycle from Feb-2015, in our view.
• However the total quantum of such gains will be small in comparison to the gains made in previous rate easing cycles when investment book used to be ~45% of total assets.
Source: Company Data, PL Research
Source: Bloomberg, RBI, PL Research
Corporate Investment Book (As % of FY14 B/s)
Bank’s SLR portfolio remains well above the limit mandated by RBI
Source: Bloomberg, PL Research
G-Sec & Corp bond yields have softened by >55 bps each from last Quarter
1/2/2015 19
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
Yes Axis Kotak ICICI Indusind HDFCB
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
Jan
-91
Apr
-92
Jul-
93
Oct
-94
Jan
-96
Apr
-97
Jul-
98
Oct
-99
Jan
-01
Apr
-02
Jul-
03
Oct
-04
Jan
-06
Apr
-07
Jul-
08
Oct
-09
Jan
-11
Apr
-12
Jul-
13
Oct
-14
SLR limit Banks' SLR portfolio
Current 1month 3month 6month
Corporate Bond (%)
1Year 8.60 -0.04 -0.48 -0.38
3Year 8.62 -0.04 -0.61 -0.61
5Year 8.61 -0.07 -0.69 -0.69
10Year 8.55 -0.17 -0.76 -0.77
Govt. Securities
1Year 8.21 -0.11 -0.38 -0.32
5Year 7.99 -0.18 -0.53 -0.68
10Year 7.92 -0.25 -0.55 -0.86
Variation
LilladherPrabhudas Treasury gains – Could now move in bank’s favour
• We estimate that 50bp decline in bond-yields would enable banks to incur treasury gains varying between 5% to 21% of their FY15E PBT.
• Canara Bank, Oriental Bank of Commerce, Allahabad Bank, Corporation Bank are better placed to benefit from the decline in bond yields owing to higher AFS composition and the higher duration of their portfolio.
• Amongst private banks, Yes Bank is likely to benefit the most owing to much higher proportion of bonds/debentures in its investment portfolio.
1/2/2015 20
Source: Company Data, PL Research
Potential treasury gains arising from 50bp decline in bond yields
Source: Company Data, PL Research
But treasury gain potential is only ~10-15% of what PSUs had in the last cycle
Bank, (Rs m) SLR % AFS %M Duration
- AFS
Change in
portfolio yield
(%) - bp
Potential
bond gains
FY15E
PBT
As % of
FY15E PBT
Canara 84.7% 29.9% 3.8 50 8,372 40,438 20.7%
BOB 82.8% 23.9% 3.1 50 4,652 70,553 6.6%
BOI 86.3% 24.3% 3.8 50 5,409 39,083 13.8%
UNBK 76.1% 24.1% 3.5 50 3,839 26,910 14.3%
SBI 90.3% 22.3% 2.2 50 9,900 202,308 4.9%
PNB 82.0% 31.2% 3.5 50 7,786 57,145 13.6%
OBC 76.2% 23.7% 4.7 50 3,235 18,191 17.8%
Allahabad 79.0% 29.2% 3.4 50 2,888 16,735 17.3%
Corporation 77.6% 17.4% 3.9 50 2,171 12,076 18.0%
UCO Bank 80.6% 30.0% 3.0 50 2,960 21,365 13.9%
2002-05 Currently
Investments as % of assets 45% 28%
AFS (% of investments) 30-40% 25%
AFS duration 4-5 yrs 3-4 yrs
G-sec fall potential 3-4% 1-1.5%
Treasury gain potential (% of assets) 2.48% 0.30%
LilladherPrabhudas Net Interest Margins - Fixed rate books to be better
placed, but overall margins will remain stable • Corporate bond yields have eased significantly in past 3-4
months in anticipation of RBI easing expected from Q4FY15 onwards.
• Lower inflation, decline in funding cost and steady liquidity will enable banks to pass-on the benefits of lower rates to the borrowers unlike previous instances of policy easing effected by the RBI. We expect RBI to cut repo rate by 100bp over next one year, beginning Q4FY15.
• We expect NIMs to remain stable over FY16 (positive on YES, IIB) as banks focus on lowering their deposit cost before cutting base rates.
• Fixed rate asset books will benefit – Among banks HDFCB/KMB/IIB has high share of fixed rate book. SHTF/MMFS better placed among NBFCs,
Source: Bloomberg, PL Research
Source: Company Data, PL Research
CPI inflation moderating but above trend levels
Margins trends will remain mixed for Banks as loan mix changes
Source: Company Data, PL Research
Retail book - % of loans – Fixed rates books to benefit
1/2/2015 21
10.810.910.4
9.4 9.39.9 9.6 9.5
9.810.2
11.2
9.9
8.8
8.0 8.3 8.68.3
7.58.0 7.7
6.5
5.5
4.3
4.0
5.0
6.0
7.0
8.0
9.0
10.0
11.0
12.0
Jan
-13
Fe
b-1
3
Mar
-13
Ap
r-1
3
May
-13
Jun-
13
Jul-
13
Aug
-13
Se
p-1
3
Oct
-13
Nov
-13
Dec
-13
Jan
-14
Fe
b-1
4
Mar
-14
Apr
-14
May
-14
Jun-
14
Jul-
14
Aug
-14
Se
p-1
4
Oct
-14
Nov
-14
15% 16%
22%
8% 6%4% 5%
30%33%
4% 4%
21%
0%
10%
20%
30%
40%
50%
Axi
s
ICIC
I
HD
FCB
SB
I
PNB
BO
I
Uni
on
Ko
tak
IIB ING
SIB
Fede
ral
Retail Loans Share (ex-mortagage) NIM FY15E FY16E NIM FY15E FY16E
ICICI 3.27% 3.25% SBI 2.92% 2.90%
HDFCB 4.39% 4.47% PNB 3.06% 3.09%
Axis 3.62% 3.54% BOB 1.95% 1.94%
Kotak 4.65% 4.63% BOI 2.02% 2.06%
Yes 3.14% 3.35% Union 2.43% 2.54%
IIB 3.80% 3.86% HDFC 3.27% 3.18%
Federal 3.06% 3.01% LIC HF 2.10% 2.23%
ING 3.18% 3.18% STFC 6.75% 7.47%
J&K 3.49% 3.49% MMFSL 9.23% 9.52%
SIB 2.82% 2.80% IDFC 3.78% 3.68%
LilladherPrabhudas Margin trends – Large private banks expand margins
Source: Company Data, PL Research
Margin trend for banks
Source: Bloomberg, PL Research
While base rate has remained stable for most banks except AXSB
Source: Bloomberg, PL Research
Most banks have cut deposit rates, mostly at the shorter end…
1/2/2015 22
Cut in peak deposit rate 0-3M 3-9M 9-15M 15-36M >36M
HDFC Bank -0.50% -0.50% -0.25% 0.00% 0.00%
Axis Bank 0.00% 0.00% -0.10% 0.25% 0.25%
ICICI bank 0.00% 0.00% -0.25% -0.25% 0.00%
IndusInd bank 0.50% 1.00% -0.25% -0.25% 0.25%
Yes Bank 0.00% 0.00% 0.00% 0.00% 0.00%
SBI -0.50% 0.00% -0.25% -0.25% -0.25%
Bank of Baroda 0.00% -1.30% -0.35% -0.20% 0.00%
Bank of India -0.25% -0.25% -0.35% -0.15% -0.15%
Punjab National Bank 0.00% 0.00% 0.00% 0.00% -0.25%
LilladherPrabhudas Fees – Slowdown everywhere, we expect a gradual
recovery
• Fee income remains tepid: Private banks have reported substantial moderation in fee income as corporate loan growth remains tepid. PSU banks on other hand have been lower impacted due to their lower dependence on off-balance sheet and corporate loan growth linked fee income.
• FX/ business banking/ Retail fees holding up: Large corporate/ non-fund based fee income remains weak while 3rd party distribution and capital market fee has shown improvement.
• We expect fee income trends to improve gradually over FY16-17E and estimate 12%-15% growth over next year.
Source: Company Data, PL Research
Source: Company Data, PL Research
Fee growth remains subdued for Pvt banks but picks up for PSBs
Core fee income growth display mixed trends among banks
Source: Company Data, PL Research
PSUs – typical fee income distribution
1/2/2015 23
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
3Q
11
4Q
11
1Q
12
2Q
12
3Q
12
4Q
12
1Q
13
2Q
13
3Q
13
4Q
13
1Q
14
2Q
14
3Q
14
4Q
14
1Q
15
2Q
15
Pvt Banks PSU Banks
Core fee gr (%) 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15
Axis 14.2% 6.6% 3.6% 10.0% 4.6% 30.0%
HDFCB 9.6% 28.4% 15.0% 12.0% 2.0% -5.3%
ICICIBC 8.9% 16.7% 12.8% 11.2% 8.0% 5.5%
IIB 30.7% 31.5% 29.6% 28.1% 38.4% 30.8%
Kotak 39.6% 11.6% 6.1% 19.0% 37.6% 51.4%
Yes 68.7% 41.8% 1.5% 19.4% 12.3% 37.0%
SBI -3.9% -0.2% 20.5% 17.6% 11.2% 29.4%
BOB 21.2% 26.8% 22.5% 10.5% 6.4% -29.1%
PNB -3.4% 13.8% 10.4% 17.9% 1.5% 5.0%
LilladherPrabhudas Regulations: RBI maintains its accommodative stance
• BASEL III Implementation : No impact for private banks but some PSU banks stretched – Recent 1 yr extension given to comply with capital conservation buffer will aid to lower capital raising need in FY15-16 for some PSU banks by 40-45% - This is a welcome relief considering current PSU bank valuations.
• Pension standardization norms: Near-term pain likely to continue for PSU banks but increase in provisioning in the last 2-3 years provides comfort on long-term shortfalls – Most banks except for BOI have moved on to new mortality table. Given that regulator seems more accommodative, PSU banks may be given time to comply with pension standardization norms. As per our analysis, SBI/PNB/Union is better provided on Pension. BOB is catching up but BOI’s pension provisioning remains the weakest.
• Dynamic provisions: Certain to be implemented but RBI to wait till the tide turns; Private banks to be little impacted.
• Re-financing of Infra loans: Apart from allowing a 2 yr COD push + one time restructuring, RBI has allowed re-financing of Infra loans with a longer moratorium even for the existing loans which are standard in the books at the time of reschedulement. While this is likely to reduce slippages in the near term we believe, forbearances given to Infra loans now is very high.
• 180 to 90 day NPA recognition for NBFCs: RBI stepped up the standard provisioning and reduced the NPA recognition timeline for NBFCs to 90 days from 180 days period currently. However ample time given to comply with the fresh norms will ensure that no disruption occurs.
• NBFC NCD regulations + Removal of Gold lending restrictions: Cap on retail NCD issuance will impact gold NBFCs to some extent but removal of LTV restrictions indicate regulator’s comfort on the asset class.
• Relaxation on Liquidity Coverage Ratio: RBI allowed banks to include a higher share (7% of NDTL, up from 2% earlier) of their SLR portfolio as part of HQLA which would help most banks to comfortably meet their near-term LCR requirement of 60%.
1/2/2015 24
LilladherPrabhudas Capital: Basel III concerns only on some PSU banks !
1/2/2015 25
Source: Company Data, PL Research
PSU banks – Better and Worst placed
Source: Company Data, PL Research
RBI’s BASEL – III requirements
LilladherPrabhudas Capital: Extension of timelines but time will start
LilladherPrabhudas Credit cycle – P&L support factors limited v/s last cycle
Source: RBI, PL Research
Source: Company Data , PL Research
Recoveries/upgrades dipped in FY13 – Slippages may come off but upgrades/recoveries unlikely to improve in a hurry
…Bond sensitivity is just 15% now v/s the last cycle
Source: Company Data, PL Research
Treasury gains was 2-3% of loans in each yr of FY02-04 while…
Source: RBI , PL Research
Recoveries/upgrades were high in the previous cycle (SARFAESI + Land appreciation + quick global recovery)
1/2/2015 30
LilladherPrabhudas Asset quality – how has the slippage / credit cost trend
varied in previous recovery?
Source: Company Data, PL Research
Fresh slippage trend across economic cycles
• Banks have reported sharp improvement in slippage trend in the earlier phases of economic recovery.
• However what makes this cycle different is that while the impact was earlier limited to select sectors (metals, textiles & IT) the ongoing economic downturn has been more generic and has significantly impacted the banks asset quality due to weak conditions in the infrastructure sector, towards which banks have significant exposure (15% of total).
• Also, the restructured book has swelled to ~6% of total loans and this poses high relapse risk. On two-year lag basis the CDR failure rate has already increased to 44% on the basis of number of cases approved for restructuring and 25% on amount-wise basis.
• Moreover we believe that the GDP growth recovery will be fairly gradual over next two years unlike 8.9% average GDP growth that we had in FY05-FY08 period thus driving modest improvement in bad loan formation.
• We thus remain conservative in our fresh slippage estimates for FY16-17E and are building in only marginal improvement.
Bank of Baroda 2.94% 2.50% 2.74% 2.97% 1.62% 0.59% 0.59% 0.82% 0.34% 0.60% 0.52% 0.61% 1.00% 0.81% 0.75% 0.70% 0.70%
Bank of India 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 1.13% 0.55% 0.88% 1.38% 1.20% 1.00% 0.90% 0.90%
Punjab National Bank 1.29% 2.07% 2.23% 2.73% 0.31% 0.45% 0.70% 0.35% 0.60% 0.59% 0.93% 0.90% 1.11% 1.37% 1.30% 1.20% 1.15%
State Bank of India 1.35% 1.84% 2.01% 2.50% 0.67% 0.06% 0.48% 0.53% 0.52% 0.79% 1.27% 1.42% 1.11% 1.28% 1.18% 1.10% 1.05%
Union Bank 3.27% 2.36% 0.63% 0.33% 0.57% 0.69% 0.64% 0.65% 0.84% 0.92% 0.81% 0.96% 0.85% 0.80% 0.78%
LilladherPrabhudas PSBs in FY14 resorted to higher NPA sale to ARCs
• PSBs in FY14 resorted to heavy sale of NPAs to Asset Reconstruction Companies (ARCs) especially in the H2FY14 period.
• BOI/SBI/Canara/CBI have been the highest sellers of NPAs.
• BOI/SBI have received 50-60% consideration on assets sold, implying haircut of 40% on book value
• In H1FY15, PSBs had lower sale of NPAs v/s FY14 despite selling off two large accounts and was due to RBI’s change in norms for ARCs on participation and capital infusion to buyout assets. BOI continued to sell NPAs, while ICICI bank saw high NPA sale in H1.
LilladherPrabhudas CDR referrals have declined but approval rate going up
• CDR referrals have declined in past few quarters from peak of Rs453bn in Jun-Sep 2013 to Rs133bn in the Jun-Sep 2014 quarter.
• However approval rate has been trending higher and has increased to 82% on amount-wise basis and 79% on basis of number of cases approved.
• The average amount per successful referral remains lumpy indicating the continued stress faced by the mid-corporate and SME segment though number of such referrals have declined over past one year.
Source: CDR cell, PL research
Source: CDR cell, PL research
CDR referrals have declined in past two quarters – amount wise
…and by amount approved
Source: CDR cell, PL research
However approval rate has trended higher – both by no. of cases
1/2/2015 38
Rs bn Cases referred Amount Cases approved Amount Avg. amount per case
Jul -Sep 2012 33 189 18 189 11
Oct-Dec 2012 25 210 35 246 7
Jan-Mar 2013 30 311 39 170 4
Apri l -Jun 2013 27 394 14 213 15
Jun-Sep 2013 31 249 16 220 14
Sep-Dec 2013 25 453 12 170 14
Dec-Mar 2014 17 223 33 411 12
Mar-Jun 2014 2 29 10 181 18
Jun-Sep 2014 14 133 19 191 10
64%
66%
68%
70%
72%
74%
76%
78%
80%
82%
Ma
r‐1
1
Jun‐
11
Sep‐
11
Dec
‐11
Ma
r‐1
2
Jun‐
12
Sep
-12
Dec
‐12
Ma
r-1
3
Jun
-13
Sep
-13
Dec
-13
Ma
r-1
4
Jun
-14
Sep
-14
By number of cases (%)
60%
65%
70%
75%
80%
85%
Ma
r‐1
1
Jun‐
11
Sep‐
11
Dec
‐11
Ma
r‐1
2
Jun‐
12
Sep
-12
Dec
‐12
Ma
r-1
3
Jun
-13
Sep
-13
Dec
-13
Ma
r-1
4
Jun
-14
Sep
-14
By amount approved (%)
LilladherPrabhudas Is CDR success rate deteriorating?
Source: CDR Cell, PL Research
Source: CDR Cell, PL research
• The efficacy of CDR led restructuring has declined as the failure rate continues to increase. The CDR failure rate has increased to 29% on the basis of number of cases and 13% on amount-wise basis. This makes CDR restructuring only slightly better than the bilateral restructuring carried by banks where the failure rate has been typically ~20%.
• Nearly ~50% of total restructuring via CDR route has happened in past two years. We believe that as more number of cases comes out of moratorium over next six months the failure rate would trend higher.
• On two-year lag basis the CDR failure rate has increased to 44% on the basis of number of cases and 25% on amount-wise basis.
• Infrastructure, Iron & Steel and textiles account for ~60% of total restructuring
• The growth rate in CDR led restructuring has been the highest for sectors like textiles, pharmaceuticals and engineering besides infrastructure while sectors like petrochemicals, sugar and cement have shown reduction in the total outstanding restructured amount.
CDR failure rate –increasing by both amt approved and no. of cases
Composition of CDR restructuring: Infra & Metals a/c for >50%
1/2/2015 39
0%
2%
4%
6%
8%
10%
12%
14%
21%
22%
23%
24%
25%
26%
27%
28%
29%
Sep-13 Dec-13 Mar-14 Jun-14 Sep-14
By number of cases (%) By amount approved (%) (RHS)
Infrastructure
36%
Iron & Steel
16%
Textiles
9%
Construction6%
Ship Building / Ship-Breaking
4%
Engineering
4%
Pharmaceuticals
4%
Others20%
LilladherPrabhudas Restructuring Monitor – most restructured accounts continue
to remain under stress based on interest coverage ratio
1/2/2015 40
Source: Media Reports, ACE Equity, PL Research
LilladherPrabhudas Restructuring Monitor – most restructured accounts continue
to remain under stress based on interest coverage ratio
1/2/2015 41
Source: Media Reports, ACE Equity, PL Research
LilladherPrabhudas Restructuring Monitor – most restructured accounts continue to
remain under stress based on interest coverage ratio
1/2/2015 42
Source: Media Reports, ACE Equity, PL Research
LilladherPrabhudas Sensitivity - Earnings and Price Target sensitivity to
change in loan growth, credit cost and risk-free rate
• We have analyzed the earnings and PT sensitivity for major banks to changes in loan growth, credit cost, fresh slippages and reduction in risk-free rate.
• We note that this is not a blue sky scenario but a possible outcome if the macro scenario were to improve at a rate, slightly better than expected.
• We have built in three cases for earnings and PT sensitivity –
– Case I: 2% higher loan growth and 10bp lower credit cost
– Case II: Case I + 25bp decline in fresh slippages
– Case III: Case II + 50bp decline in risk-free rate Source: PL Research
Case 1: Our EPS and PT increases by ~4%/3% respectively in case-I
Source: PL Research
Base case estimates and PT
1/2/2015 43
Name of bank
Case I: 2% higher loan growth, 10bp lower credit cost
EPS change (%) ABV PT change (%)
FY16E FY17E FY16E FY17E Sep-FY16E
Axis 3% 3% 210.1 249.2 2.3%
HDFC 3% 4% 273.8 324.2 2.8%
ICICI 3% 3% 125.6 143.5 1.8%
IndusInd 3% 5% 227.5 279.1 3.0%
Yes 3% 4% 323.4 383.8 3.4%
Bank of baroda 5% 5% 843.8 983.5 3.1%
Bank of india 7% 6% 361.0 437.0 0.3%
Punjab National Bank 5% 6% 68.8 204.6 3.0%
State bank of india 6% 6% 132.0 153.0 2.8%
Union bank 6% 7% 238.5 291.5 1.9%
Name of bank EPS ABV PT - original P/ABV multiple - original P/E multiple - original
Bank of Baroda 138.7 174.6 847.2 989.1 1,175.0 1.3 7.5
Bank of India 67.6 89.1 363.0 441.0 350.0 0.8 4.3
Punjab National Bank 29.8 35.3 169.2 205.1 208.0 1.1 6.4
State bank of India 22.3 27.7 132.0 154.0 350.0 1.9 10.7
Union bank 48.7 60.6 239.5 292.9 255.0 0.9 4.5
LilladherPrabhudas Sensitivity - Earnings and Price Target sensitivity to
change in slippages and risk free rate
Source: PL Research
Source: PL Research
• Under Case I our earnings estimate increases by ~4% on average while the increase in our PT remains at ~3%.
• If we are to build additional 25bp decline in fresh slippages over and above Case I (in previous recovery phases the pace of decline fresh slippages has been particularly sharp) than our EPS estimate increases by ~5% on average while our PT increase by 6% over our base case estimate.
• If we are to further build an additional 50bp decline in risk free rate, as we expect 10yr bond yield to decline to 7.5% over next three quarters, than our PT increase to ~14% over our base case estimate.
We estimate AXSB to deliver an earnings CAGR of 21% YoY over FY15-17E led by healthy traction in NII and other income. This will be aided by reduction in fresh delinquency estimates to 1.1% for FY16E (~1.3% currently) on the back of gradual improvement in economic cycle and robust retail franchise which AXSB has build over past two years. Small restructured asset portfolio at 2.5% of total loans, and contained gross NPL ratio of 1.3% (78% coverage ratio) gives us comfort. We increase our PT on AXSB to Rs545 as we increase our FY15E/FY16E earnings by 3%/4% respectively and retain our BUY rating.
Retail franchise improving steadily: AXSB’s retail portfolio has steadily increased to ~40% of total loans and is dominated by secured loans. This has helped the bank in maintaining firm margins ably supported by steady growth in CASA mix at ~44% (~40% on daily average basis). We expect margins to move in a narrow band while management continues to remain conservative in its full year margin guidance at 3.5% (3.93% in H1FY15).
Asset composition remains stable; well placed to benefit from revival in investment cycle: The composition of corporate assets remain healthy as nearly 91% of corporate exposure remains above investment grade. The composition of SMEs with rating between SME1-SME3 also remains stable at 80%. The bank has a healthy Tier-I capital base of 12.6% and is thus well placed to benefit from any revival in investment cycle.
Asset quality has deteriorated but well under control: AXSB has reported 32%/41% rise in GNPL/Net NPLs over past one year however coverage ratio has remained stable at ~67%. AXSB conservatively maintains its Rs65bn of stressed asset guidance in FY15 despite only Rs26bn of stress loan formation in H1FY15. O/s RA portfolio remain stable at 2.5% of total loans. AXSB also maintained its credit cost guidance of 75‐80bps for FY15.
Valuation: We revise our PT to Rs545 based on 2.4x Sep-2016E ABV and reiterate our BUY rating on the stock.
1/2/2015 47
Key Financials (Rs m)
Y/e March FY13 FY14 FY15E FY16E FY17E
Net interest income 96,663 119,516 147,017 174,480 210,996
We expect HDFCB's earnings growth to revive to 25% CAGR over FY15-17E as loan growth pick-up while investment made in enhancing the rural / semi-urban network begins to yield results. During Q2FY15 HDFCB added 112 branches (higher ratio in metro & semi‐urban areas) and 4,939 employees to its employee count. HDFCB is well provided (73% coverage ratio), has floating provisions of ~Rs18.5bn and healthy capitalization levels. We find valuations attractive and maintain our BUY rating with a revised PT of Rs1,090, which corresponds to 3.7x Sep-2016E ABV.
Robust NII growth, better fees but higher opex as well: HDFCB continues to deliver at the NII line despite sluggish loan growth led by robust margin trends. NIMs have improved to 4.5% against management guidance of 3.9%-4.3% and we expect it to remain stable as bank benefits from higher share of fixed rate loans in a falling rate environment. The healthy growth in retail loans led by auto and high yielding unsecured loans has also contributed to margin expansion.
Operating expenses picks-up: Opex has picked up as the bank continues to expand its network and added 4,939 employees which was long overdue after such rapid expansion over past two years. Management expects opex growth to moderate even as business prospects improve from new branches. We estimate C/I ratio to moderate to 44% by FY17E.
Loan growth prospects improve: Wholesale book has been growing faster than retail book but the later has now started catching up especially from Auto loans (CV/CE) and unsecured segment. The Bank’s unsecured book growth was healthy on increased spends in cards & personal loans offsetting slowing growth in housing loans. HDFCB indicated healthy loan growth prospects to continue on underlying improvement in product segments sales and as bank has been increasing its footprint.
Valuation: We maintain our BUY rating on HDFC Bank with a PT of Rs1,090, which corresponds to 3.7x Sep-2016E ABV.
1/2/2015 50
Key Financials (Rs m)
Y/e March FY13 FY14 FY15E FY16E FY17E
Net interest income 158,111 184,826 222,371 272,159 331,712
ICICIBC has shown steady improvement in core earnings led by revival in loan growth, margin expansion and increase in operating leverage. Consequently core-RoE has improved from 10% in FY09 to 17% in FY14 and we estimate Core-RoE to improve to ~19% by FY17E. Fresh NPL formation has been stable though provisions increased in the recent quarter due to lumpy slippages from restructured assets which stands at Rs110.2bn (3% of total loans). Management indicated of a restructuring pipeline of Rs18bn. We revise our PT to Rs.390 as we roll forward our earnings to Sep‐2016 book and maintain BUY rating on the stock.
Margins to remain stable; fee income turnaround to drive earnings: ICICI has shown significant improvement in margins led by rising share of high margin domestic business. Management has guided for NIMs of 3.3%-3.4% over FY15E. The fee income though remains sluggish led by muted corporate fees while retail fee growth remains healthy and accounts for ~60% of total fees. We estimate other income growth to improve to 15% YoY over FY16E enabling 18% CAGR in net earnings over FY15-17E.
Asset quality remains stable: NPL growth has been under control at 15% YoY while retail continues to do well. The NPL coverage ratio is healthy at 66% while the o/s restructured assets stands at 3% of total loans. Bank maintained its guidance of lower stress asset accretion in FY15 v/s FY14 and suggested having a restructured asset pipeline of Rs18bn.
Subsidiaries performance improving; raise PT as we roll forward our valuations: AMC and Capital market business have shown a healthy growth while life insurance business is improving gradually. We raise our PT to Rs390 (from Rs350) as we roll forward our earnings to Sep‐2016 book. We maintain our BUY rating.
Other key catalysts: 1) repatriation of further capital from its overseas subs, 2) greater profit contribution and dividends from its various subsidiaries, 3) Listing of its life-insurance business, and, 4) lower losses on ARCIL security receipts and securitization losses.
1/2/2015 53
Key Financials (Rs m)
Y/e March FY13 FY14 FY15E FY16E FY17E
Net interest income 138,664 164,756 198,759 234,476 282,116
We estimate IIB to deliver an earnings CAGR of 31% over FY15-17E led by robust NII growth and continued traction in fee income. NIMs are likely to expand as IIB benefits from declining cost on the funding side while lending yield remains high. Optimistic outlook on CV loan growth will help B/s growth and margin accretion. Asset quality remains steady and IIB continues to benefit from benign credit cost. We upgrade our rating to BUY with a PT of Rs855, which corresponds to 3.4x Sep-2016E ABV.
Core performance remains robust: IIB's core PPOP (excl treasury) growth has been running strong at ~23% YoY over past two years. Though there has been some moderation due to aggressive branch expansion and technology related spending but we expect growth trends to recover as fee income/margins improves. The investment in technology and branches has enabled IIB to gain market share in both liabilities and assets.
CASA mix to improve further; fee income remains robust: We expect fee income to remain robust on steady growth in third party distribution fees (13% QoQ growth in Q2FY15) and pick-up in debt syndication business particularly as bond yield eases further. CASA mix has improved 213bp YoY to 33.9% and we expect it to reach ~36% by FY17E.
CV cycle recovery to boost growth/margins: Much anticipated recovery in CV cycle will boost growth and margins for IndusInd Bank. Management’s focus has been high on non‐auto retail portfolio but the outlook on CV loan book remains positive.
Asset quality holding steadily; credit cost to remain under control: IIB has reported healthy trends in asset quality with annualized slippage run-rate of ~1% and coverage ratio of ~70%. As a result of no large slippages, credit cost was on ~49bps (annualized) in Q2FY15. IIB’s restructured portfolio remains insignificant as proportion of total loans.
Valuation: We increase our FY16E earnings by 4% and revise our PT to Rs855 (from Rs690 earlier). We upgrade our rating to BUY.
1/2/2015 56
Key Financials (Rs m)
Y/e March FY13 FY14 FY15E FY16E FY17E
Net interest income 22,329 28,907 35,388 44,772 58,604
Significant synergies in merger: Recent announcement of merger with ING Vysya will provide significant synergies - (1) Product penetration will increase as KMB leverages on ING’s customer profile & benefits from minimal geographical overlap. KMB’s products like tractors & ING’s strength for SME will help retain high business growth. (2) Significant opex reduction in next two years will be seen as VYSB’s acquisition has doubled KMB’s branch presence, which will restrict opex growth. (3) Leveraging subsidiary business (insurance and capital market) through ING branches will boost other income for KMB. Also the acquisition will give KMB access to the South Indian geography where in it’s presence was very limited.
Margins at all time highs, to start moving downwards: Margins have moved to ~5% in H1FY15 which are at all time high due to high growth in its retail book. Margins should start moving downwards to ~4.3-4.5% in medium term which looks more sustainable. Also, post VYSBs’ merger margins should move down as VYSB presence is in a very competitive market and its NIMs are lower than KMB. We do not see any large dips in margins in the near term as KMB’s has been adding decent SA portfolios & VYSB’s merger will add similar CASA levels.
Asset quality issues to be limited post VYSB’s merger: Though some corporate exposures of VYSB are riskier than that of KMB corporate exposure, we do not see very high write-offs post merger. Also, KMB’s management style has been risk averse and known to turnaround bad assets, which will help clean up the risky book acquired book from VYSB.
Fee income to remain robust; valuations: Fee income growth of 35% was robust in H1FY15 on better TPD products and improving FX especially retail (50% of fees). We believe, fee income will remain robust as KMB has ramped up its offerings to retail customers and leveraging technology for FX & DCM business improvement. Although valuations have moved up to 4x Sep-16 book we retain ACCUMULATE with TP of Rs1250.
1/2/2015 59
Key Financials (Rs m)
Y/e March FY13 FY14 FY15E FY16E FY17E
Net interest income 41,689 48,382 53,276 62,980 76,629
Yes bank has reported healthy earnings CAGR of 30% over past three years led by healthy revenue growth and controlled opex/provisioning expenses. Margins in Q2FY15 improved by 20bp YoY on the back of robust loan growth (30% YoY) and we expect margins to expand further. Asset quality saw some deterioration from the corporate book but is manageable. We estimate RoA to improve to 1.72% by FY17E from 1.55% in FY14 due to improving liability franchise, margin expansion and pick-up in other income as rate environment moderates further. We revise our PT to Rs815 (from Rs700), which corresponds to 2.3x Sep-2016E ABV.
Operating metrics remain strong: Yes Bank’s NII growth remains steady at 27% YoY led by improving NIMs and resumption in loan growth. Going ahead, margins may inch‐up further as bank plans to introduce more products under retail consumption side and focus on growing its balance sheet after a long period of consolidation.
Fee income to pick-up further: Core fee growth remained strong at 50% YoY mainly from advisory, refinancing & syndications, while transactional banking fee showed slight moderation during Q2FY15. We expect other income to pick-up as YES is most levered to decline in corporate bond yield amongst private banks.
Asset quality remains steady; slippages to increase against a low base: Fresh slippages are likely to increase from a low base but seems to be manageable. We are building in credit cost of 65bp over FY15-17E which seems adequate given that YES has already built in CCP buffer of 50bp of loans which provides us comfort on asset quality.
Return ratios to inch higher: Yes Bank’s asset and liability franchise is getting granular and sticky which is leading to margin expansions & stable asset quality (which was perceived as risky) and is getting reflected in its ROA. Also, capital efficiency will help RORWAs to remain ~2.3% which is similar to peers, plus adequate capital position will help build loan growth momentum. We retain BUY with revised PT of Rs815 (2.3x Sep‐16 book).
1/2/2015 62
Key Financials (Rs m)
Y/e March FY13 FY14 FY15E FY16E FY17E
Net interest income 22,188 27,163 34,913 44,274 54,587
Bank of Baroda remains our preferred pick amongst PSU banks owing to its better asset quality performance, healthy wage/pension provisioning cushion and higher capitalization levels. The fresh slippage rate for BOB remains ~2% annualized, much better than peers and management has guided for improving trends in asset quality going forward. The stock is trading at attractive levels of 1.1x Sep-FY16E ABV, which we find attractive as BOB maintains its earnings superiority over peers with an estimated RoE of ~16% for FY17E. We maintain BUY with PT of Rs1,175 which corresponds to 1.3x Sep-FY16E ABV.
Business growth remains modest: The advances and deposit portfolio of the bank has reported a modest decline during 1HFY15 as bank chose the consolidation approach instead of risky lending. However NII growth still remains healthy and was supported by healthy domestic NIMs. BOB has further shed preferential rate deposits and CDs (bulk deposits are less than 8%) which helped it manage its funding cost while steady growth in retail has helped improve lending yields.
Well provided on wage provisions: BOB is making adequate provision potential wage revision at Rs750mn per quarter which will be sufficient to cover potential wage hike up to 15‐16% (quite adequate in our view).
Asset quality remains better than peers; higher coverage ratio/CAR comforts us: Fresh slippage rate for BOB remains at <2%, much better than peers while the o/s std. restructured assets stands at 5.9% of total loans. Management guided for improving trends in asset quality over medium term. Higher coverage ratio ~65%, healthy Tier‐I at ~9.3% and better RoE profile still gives us comfort.
Valuation: We revise our PT to Rs1,175 based on 1.3x Sep-FY16E ABV. We continue to maintain our BUY rating on the stock.
Risks: Significant deterioration in slippage trend after new chairman takes over and subdued business growth are key downside risks.
1/2/2015 65
Key Financials (Rs m)
Y/e March FY13 FY14 FY15E FY16E FY17E
Net interest income 113,153 119,653 132,732 150,425 178,391
Bank of India has reported muted performance over past few quarters as fresh slippages remained high while coverage ratio declined to 56%, including technical write-offs. BOI also has a weak capital base with core-Tier I of ~6.9%. However this reflects in banks valuations at 0.7x FY16E ABV which is almost ~40% discount to peers. The high government ownership of ~66%, healthy prospects of treasury gain and steady improvement in asset quality as risk of relapse from restructured book remains low will help bank improve upon its earnings profile. Hence, we upgrade our rating to BUY from Accumulate with PT of Rs350 which corresponds to 0.9x Sep-2016E ABV.
NII growth has bounced sharply: BOI’s NII growth has been running strong led by healthy recovery and upgrade trend, uptick in CD ratio and margin expansion of 15bp QoQ. Other income however remained muted at 8.5% YoY decline (18.5% YoY decline excluding treasury profits) and dragged revenue growth to 11% YoY. Management reiterated its focus on fee income and has guided for 20% YoY growth in core fees.
Concerns remain on wage revision/mortality provisions: BOI has been making wage provisions based on an average wage hike of ~11% v/s peers at ~13‐15%. Besides, BOI has also decided to continue with old LIC mortality tables based on the advice it has received from the actuaries. We note that the shift to new mortality table, if required, will impact earnings by Rs6bn – 10.7% of FY16E PBT.
Asset quality trends improving; Tier‐I has improved to ~8%: Fresh slippages moderated to 3.1% of loans (4% in Q1FY15) while BOI did a fresh restructuring of Rs13.58bn. Management guided for an o/s restr. pipeline of Rs16bn while std. restructured assets stand at 3% (2% exc.SEB). BOI issued Rs25 bn worth of Tier‐I bonds which helped improve Tier‐I by 72bp to 8%.
Valuation: We revise our PT to Rs350 (from Rs320) based on 0.9x Sep-2016E ABV and change our rating from ‘Accumulate’ to ‘BUY’.
1/2/2015 68
Key Financials (Rs m)
Y/e March FY13 FY14 FY15E FY16E FY17E
Net interest income 90,240 108,305 120,471 146,514 181,169
PNB is aiming to grow its loan book inline with the system after alternating between rapid loan growth (25% average during FY11-FY12) and period of consolidation (9% average loan growth during FY13-FY14). The bank has reported steady accretion in GNPL (~26% YoY growth) while the restructured assets portfolio remains highest amongst peers at 10%. We believe this pose high risk going forward as notwithstanding regulatory forbearance the slippages from restructured assets are on a rise. We believe that risk reward is unfavourable at current price levels and hence downgrade our rating to REDUCE with a revised PT of Rs208.
Margins to remain better than peers: PNB’s margins remains better than peers at ~3.4% aided by its strong liability franchise and healthy lending yields. The bank incrementally has been focusing on large corporate and looking for quality growth which will likely put pressure on margins. However we expect NIMs to still maintain its leadership over peers.
Asset quality remains worrisome; relapse risk from restructured portfolio remains high: PNB's asset quality continues to worsen at an accelerated pace while fresh restructuring also remains elevated. Also, the bank reported NPL formation of Rs12.8bn in its restructured portfolio which concerns us, given the large restructured portfolio the bank has. We remained concerned on the fallout from restructured book as at least 35‐40% of book will be moving out of moratorium in next 12‐15 months.
Prudent NPA provisions – Good intent but late: PNB provided Rs6.8bn of additional provisions for specific loan a/c. Management has adopted policy to use write‐back of investment depreciation and recovery from written off a/c for making loan a/c specific provisions, which is prudent but is quite late in realizing the need of prudent provisions.
Valuation: We revise our PT to Rs208 based on 1.4x Sep-2016E ABV, adjusted for potential slippages from restructured assets. We downgrade our rating to REDUCE.
1/2/2015 71
Key Financials (Rs m)
Y/e March FY13 FY14 FY15E FY16E FY17E
Net interest income 148,565 161,460 176,389 205,214 238,490
SBI appears to have crossed the worst of the asset quality cycle as fresh slippage rate has declined to 2.9% in 1HFY15 vs ~4% in 1HFY14 and management guiding for positive trends ahead. SBIN undoubtedly has one of the best liability franchise which will enable the bank to compete aggressively as rate environment eases and corporate loan demand starts to pick-up. Fresh restructuring also declined on sequential basis and the total RA portfolio remains relatively small at 3.6% of total loans. The bank is well provided on both pension/wage provisions and focus on large corporates/secured credit will help lower credit cost going forward. We retain BUY with revised PT of Rs350 as we roll‐forward our valuations to Sep‐16 book.
Opex efficiency continues; other income remains strong: SBI’s core PPoP continues to grow at a healthy rate aided by continued opex efficiency and momentum in other income growth. NII growth has been modest due to flattish trend in advances and decline in domestic margins.
Asset quality showing positive signs; restructuring pipeline stands at modest ~Rs30 bn: Asset quality held stable with fresh slippages moderating to 2.6% (3.3% in Q1FY15) while fresh restructuring also declined to Rs34.48bn. GNPLs thus remain flat on QoQ basis and appears better when compared with most other SOE banks. O/s std. restructured asset stands at 3.6% of total loans. SBIN guided for restructuring pipeline of Rs30 bn going ahead.
Return ratios to improve; reiterate BUY with revised PT of Rs350: We estimate SBIN’s RoA to improve gradually over next two years as – (i) provisioning expenses moderates in line with improving asset quality; bank is already going slow on mid-corporate and SME segments for few quarters now, (ii) CD ratio picks up and low yielding investments (30% of total assets currently) moves gradually into loans, (iii) international NIM continues to improve further. We retain our BUY rating with revised PT of Rs350, as we roll forward our valuations to Sep‐2016.
1/2/2015 74
Key Financials (Rs m)
Y/e March FY13 FY14 FY15E FY16E FY17E
Net interest income 443,313 492,822 542,852 622,746 716,510
Union Bank has adopted a cautious approach on loan growth as fresh slippages remain high while capital position remain scarce. During Q2FY15, NIMs contracted by 7bp QoQ due to interest reversals (Rs730 mn) on new slippages and ~14% QoQ decline in current account deposits. Asset quality disappointment continued as fresh slippages stood at Rs19.68bn (3.4% annualized) and was led by lumpy slippages in textile and cement sectors. However management maintained its guidance to bring down GNPL ratio to ~4% by end of FY15 vs 4.7% currently and improve NIM to 2.8‐2.9%. We upgrade our rating to BUY from Accumulate with PT of Rs255 which corresponds to 0.9x Sep‐16E ABV.
Fee/Fx income drives revenue growth: UNBK reported steady revenue growth led by healthy uptick in core fee income and robust exchange profits. NII growth was muted at 6.6% YoY affected by interest reversals on slipped accounts, declining current account deposits and modest loan growth.
Asset quality disappoints – management keeps the guidance unchanged: Asset quality remains worrisome as stressed asset formation remained high led by rise in both fresh slippages and restructuring. O/s restructured asset portfolio increased marginally to 5.3% of total loans (2.8% excluding SEB restructuring) though still stands better than peers. Management maintained its guidance to bring down GNPL ratio to ~4% and improve NIM to 2.8‐2.9% by FY15 end which we believe is difficult to achieve.
Capital position remains weak; muted growth to help in short term: Tier I capital at 7.3% (without profits) in Q2FY15 remains low but is not expected to be alarming as management reiterated of slowing loan growth to 10‐12% for FY15, helping maintain capital levels and pre‐empt the need for immediate capital infusion. We upgrade our rating to BUY from Accumulate with PT of Rs255/share which corresponds to 0.9x Sep‐16E ABV.
1/2/2015 77
Key Financials (Rs m)
Y/e March FY13 FY14 FY15E FY16E FY17E
Net interest income 75,428 78,793 88,809 105,604 123,847
Realigned Business model: Federal Bank undertook restructuring of its business model over the past couple of years, wherein it realigned some of its business processes and changed its focus on loan-mix towards high yielding and less risky assets like SME/Retail (LAP & Gold loans). It also started focusing on retail liability play with high focus on retail term deposit and by cutting reliance on Bulk deposit (now only ~7% of deposits from 15% in FY13). We believe that the structural change in business model, coupled with thrust on expanding beyond Kerala, will help the bank grow strongly in next couple of years. We are factoring in 17%/20% credit growth over FY15E and FY16E respectively.
Looking for fresh avenues of fee income: The Bank is cognizant on its fee income being weak, so is looking to introduce newer fee income avenues over next 2 years. It wants to improve its merchant banking, third party distribution, rationalization and centralizing process for FX fees, loan related fees, account related charges etc. It also has revamped its treasury division. It also is in process to strengthen its trade finance & cash management business for fee income.
Margins to improve gradually: Margins will improve gradually as management has put in efforts to rationalize process in terms of credit appraisal system reducing slippages (reduced interest reversals). Also, higher focus on SME/Retail especially LAP & Gold will help improve its margins upwards in FY15/FY16. On the liability side, higher term deposit reliance will not impact cost of funds in downward rate cycle as average tenure of the deposits is 1.4 years with 45% of deposits in 1-3 year bucket.
Valuations justified: Federal trades at 1.4x Sep FY16, which we believe in is reasonable for its changing business mix, superior management, improving & rationalizing processes will help achieve higher ROAs from 1.2% currently. The Bank has leadership position in Kerala and is now also focusing outside Kerala, in Maharashtra, AP, Gujarat which are strong SME/Retail driven and matches with the Bank’s strategy.
1/2/2015 80
Key Financials (Rs m)
Y/e March FY13 FY14 FY15E FY16E FY17E
Net interest income 19,747 22,286 23,712 27,178 32,726
Slowdown in loan book in FY15, pick-up seen in FY16/17: J&K bank’s loan growth has come off from 20-25% in H1FY13 to ~9.5% in H1FY15. J&K state has ~45% share of loan book and has been the growth driver. The management has guided for a lower growth of 15-20% within the J&K state from 20-25%, as the state has witnessed worst floods over the decades impacting loan demand. However, the management of the bank has guided that FY16 growth is likely to come back as J&K state would need credit post the natural calamity.
Margins to remain intact: J&K Bank earns higher margins of ~6% in J&K state and ~2.7% which brings the blended margins at ~4% and is the highest among regional banks. Although margins may be impacted slightly in near term on lower loan growth but better CASA and higher retail share would keep margins intact near ~4%. Unlike Q1FY15, we do not see large interest reversals which can impact margins in H2FY15 as well as FY16.
Asset quality on stabilization mode: Asset quality has deteriorated sharply in Q1FY15 on slippage of two large accounts into NPA, while large impact was anticipated on floods but was absorbed by restructuring package approved by RBI & J&K SLBC. It has received cases worth Rs8.3bn of which Rs1.64bn have been approved under the scheme and rest Rs6.6bn will be approved in H2FY15. Bank also expects some more additional cases of Rs5-7bn in the restructuring package. Under the package Bank has converted existing loans to term loan with moratorium of 2 years and duration of loans to 3-5years.
Multiples to move back gradually: Non-J&K book growth remains slow and now management has guided for slower growth for J&K state impacting earnings traction in near term. However FY15E ROAs of ~1% still remains better than SOE banks and we believe earnings multiple will move back to trend levels of 1.1x-1.3x gradually from 0.8x currently (Sep-16 book).
1/2/2015 83
Key Financials (Rs m)
Y/e March FY13 FY14 FY15E FY16E FY17E
Net interest income 23,160 26,845 28,705 32,925 38,627
Operating profi t 16,614 18,361 17,978 20,420 24,087
Provis ions 2,842 1,477 6,055 2,779 2,735
PBT 15,266 17,520 12,672 18,491 22,203
PAT 10,551 11,825 8,364 12,574 15,098
Reported PAT 10,551 11,825 8,364 12,574 15,098
PPP growth 32.1% 4.9% -1.4% 13.6% 17.2%
PAT growth 31.4% 12.1% -29.3% 50.3% 20.1%
Source: Company Data, PL Research
ROA decomposition
FY13 FY14E FY15E FY16E FY17E
NIM/Assets 3.6% 3.6% 3.5% 3.5% 3.5%
Fees/Assets 0.5% 0.4% 0.4% 0.4% 0.4%
Inv. Profi ts/Assets 0.2% 0.1% 0.1% 0.1% 0.1%
Net revenues/Assets 4.3% 4.2% 4.0% 4.0% 4.0%
Opex/Assets -1.5% -1.6% -1.7% -1.8% -1.7%
Provis ions/Assets -0.4% -0.2% -0.7% -0.3% -0.2%
Taxes/Assets -0.7% -0.8% -0.5% -0.6% -0.6%
Costs/Assets -2.7% -2.6% -3.0% -2.7% -2.6%
ROA 1.6% 1.6% 1.0% 1.3% 1.4%
Equity/Assets 6.9% 7.2% 7.3% 7.2% 7.3%
ROE 23.6% 22.3% 13.9% 18.4% 18.9%
RORWA 2.6% 2.5% 1.5% 2.0% 2.0%
Source: Company Data, PL Research
0.5
0.7
0.9
1.1
1.3
1.5
De
c-0
9
Mar
-10
Jun
-10
Sep
-10
De
c-1
0
Mar
-11
Jun
-11
Sep
-11
De
c-1
1
Mar
-12
Jun
-12
Sep
-12
De
c-1
2
Mar
-13
Jun
-13
Sep
-13
De
c-1
3
Mar
-14
Jun
-14
Sep
-14
De
c-1
4
P/ABV 5 yr avg. avg. + 1 SD avg. - 1 SD
LilladherPrabhudas South Indian Bank
CMP: Rs29 TP: Rs35 Rating: BUY MCap: Rs39.0bn
SIB’s return ratios have suffered on structural issues like low CASA, low PSL compliance, NRI deposit de-regularization, lowering fee income and increased credit costs. SIB’s loan book growth also has come down to 15% CAGR over FY14-H2FY15 from 25% during FY08-13. But, we believe, all the structural issues like asset quality risks & moderation of return ratios have been factored in P/B multiples which is at 30% discount to regional peers. We remain positive on the stock with TP of Rs35.
Profitability to remain under pressure: Bank’s gold loan business, earlier a high growth area, coupled with higher yields, has seen a sharp reversal, slowing down overall loan growth and has put pressure on yields. It has another 5‐10% chunky gold loans above Rs0.1m which could unwound over the next few quarters (gold loan share down from 22.6% in Q4FY14 to 17% now), which can impact margins at book level. Also, its Opex & Credit cost will remain high. Credit cost have remained upwards of 1% in H1FY15.
Asset quality has turned weak, but management confident on outlook: Some slippages from restructured book, lower recoveries and upgrade has impacted asset quality in last few quarters. In Q2FY15, SIB also sold one a/c to ARC at below book (Rs580m) and has provided for the same in P&L. Management is confident on better asset quality and focus on CASA will bring back NIMs at 3%. The bank is planning a QIP of Rs6bn and has taken board approval for the same.
Valuations undemanding: SIB’s high stressed assets book (6.5% of loans in Q2FY15) v/s regional peers have impacted earnings and consequently impacted its return ratios. But, given the Bank’s business presence in Kerala & increasing expansion outside Kerala (60% incremental growth outside Kerala) with well diversified book (30% Retail & SME each and 40% Corporate book) will help expansion in margins to 3% over next couple of years. SIB is currently trading at 1x its Sep-16 book which is undemanding and hence, we maintain BUY with target price of Rs35.
1/2/2015 86
Key Financials (Rs m)
Y/e March FY13 FY14 FY15E FY16E FY17E
Net interest income 12,808 13,988 16,335 18,935 22,500
Growth (%) 25.4 9.2 16.8 15.9 18.8
Operating profit 8,486 8,843 10,166 12,032 14,716
PAT 5,023 5,075 5,549 6,603 8,489
EPS (Rs) 3.8 3.8 4.1 4.9 6.3
Growth (%) 5.9 0.6 9.3 19.0 28.6
Net DPS (Rs) 0.6 0.8 0.9 1.0 1.1
Source: Company Data, PL Research
Profitability & valuation
Y/e March FY13 FY14 FY15E FY16E FY17E
NIM (%) 2.9 2.7 2.8 2.8 2.8
RoAE (%) 20.5 16.6 16.1 16.9 18.8
RoAA (%) 1.1 1.0 0.9 1.0 1.0
P / BV (x) 1.4 1.2 1.1 0.9 0.8
P / ABV (x) 1.4 1.3 1.1 1.0 0.8
PE (x) 7.7 7.7 7.0 5.9 4.6
Net dividend yield (%) 2.1 2.8 2.9 3.3 3.6
Source: Company Data, PL Research
Stock Performance
(%) 1M 6M 12M
Absolute 6.6 (8.7) 40.1
Relative to Sensex 10.3 (16.5) 10.0
LilladherPrabhudas Operating Metrics
Source: Company Data, PL research
Source: Company Data, PL research
Gold loan mix reduced on lower growth which was high yielding
ROAs suffering from high cost especially operating costs
Source: Company Data, PL research
Despite one of the best RORWAs, SIB has lowest ROAs v/s regional peers
Source: Company Data, PL research
Loan growth has slowed down sharply for SIB in past few quarters
1/2/2015 87
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
1Q
12
2Q
12
3Q
12
4Q
12
1Q
13
2Q
13
3Q
13
4Q
13
1Q
14
2Q
14
3Q
14
4Q
14
1Q
15
2Q
15
23.4
%
18.7
%
22.5
%
21.9
%
22.6
%
20
.8%
19
.3%
17
.3%
17.2
%
16.1
%
-40.0%
-30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
22.0%
24.0%
26.0%
1Q
13
2Q
13
3Q
13
4Q
13
1Q
14
2Q
14
3Q
14
4Q
14
1Q
15
2Q
15
Gold Loan Mix in loan book Gold Loan growth
0.85%
0.90%
0.95%
1.00%
1.05%
1.10%
1.15%
1.20%
2.25%
2.35%
2.45%
2.55%
2.65%
2.75%
FY
08
FY09
FY10
FY11
FY12
FY13
FY14
FY
15
E
FY
16
E
FY17
E
Cost/Assets ROAs (RHS)
1.91%
1.24%
1.40%
1.14%
1.54%
1.02%
1.76%
0.98%
0.50%
0.70%
0.90%
1.10%
1.30%
1.50%
1.70%
1.90%
2.10%
RORWAs ROAs
Federal ING J&K SIB
LilladherPrabhudas Financials
Source: Company Data, Bloomberg, PL Research
P/BV
1/2/2015 88
Balance Sheet (Rs m)
FY13 FY14 FY15E FY16E FY17E
Net worth 28,656 32,364 36,576 41,686 48,524
Total depos its 442,623 474,911 547,881 647,616 778,122
Borrowings 12,846 27,308 34,018 38,683 44,183
Total Liabilities 496,545 548,520 633,807 744,849 889,380
HDFC has reported steady trends in individual loan growth (~22% including loans sold to HDFC Bank) led by deeper penetration in urban/semi-urban areas as few metros shows signs of stagnation. The earnings growth has moderated in recent quarters due to higher tax rate however the spread has remained stable. We estimate earnings growth CAGR to recover to 16.4% over FY15-17E while the RoE is likely to improve to 21.5% on consolidated basis. We maintain our ACCUMULATE rating on the stock with a revised PT of Rs1,200 based on SOTP methodology.
Core performance remains on track: HDFC has been reporting ~22% YoY growth in individual loan portfolio (including loans sold to HDFC Bank) while maintaining stable spreads and margins. Asset quality has been stable despite difficult environment. AUM growth has slowed down on account of modest growth in non-individual loans, the proportion of which has declined to ~30% in total loan mix.
Margins stable; funding costs look favourable going ahead: Spreads are likely to remain stable as company passes on the benefits of decline in funding cost to its customers. The competitive intensity in the current declining rate environment will be far lower than what we saw in 2009 as base rate acts as a floor for banks while the steep decline in funding cost (NCDs) gives sufficient cushion to HFCs to compete on lending rate. Revival in commercial RE book could be margin accretive but looks unlikely in the near term.
Valuation: We maintain our ACCUMULATE rating on the stock with a revised PT of Rs1,200 based on SOTP methodology. We have valued parent HDFC at 3.7x Sep-2016E ABV while subsidiaries and associates accounts for ~45% of total value in our SOTP valuation.
Price triggers: Increase in FDI limit in life insurance, merger with HDFC Bank will act as positive triggers for the stock performance.
1/2/2015 89
Key Financials (Rs m)
Y/e March FY13 FY14E FY15E FY16E FY17E
Net interest income 61,798 70,030 80,014 91,940 107,246
Growth (%) 16.2 13.3 14.3 14.9 16.6
PPP 58,823 66,701 76,865 88,865 104,385
PAT 48,483 54,402 59,776 69,250 80,945
EPS (Rs) 32.1 35.0 38.3 44.4 51.9
Growth (%) 14.5 9.2 9.4 15.8 16.9
Net DPS (Rs) 14.6 16.4 16.8 18.0 19.1
Source: Company Data, PL Research
Profitability & valuation
Y/e March FY13 FY14E FY15E FY16E FY17E
NIM (%) 95.2 95.2 96.1 96.7 97.3
RoE (%) 22.0 20.5 20.3 21.1 21.6
RoA (%) 2.7 2.6 2.4 2.4 2.3
P / BV (x) 7.0 6.3 5.7 5.0 4.4
P / ABV (x) 6.8 6.3 5.7 5.1 4.4
PE (x) 35.0 32.1 29.3 25.3 21.7
Net dividend yield (%) 1.3 1.5 1.5 1.6 1.7
Source: Company Data, PL Research
Stock Performance
(%) 1M 6M 12M
Absolute (1.2) 14.2 41.7
Relative to Sensex 2.5 6.4 11.5
LilladherPrabhudas Operating Metrics
Source: Company Data, PL research
Source: Company Data, PL research
Wholesale and market borrowings the highest for HDFC
SOTP Valuation - Subsidiaries contribute 45% of fair price
Source: Company Data, PL research
We expect higher CAGR in loan book over FY15E-FY17E v/s last cycles
Source: Bloomberg, PL Research
Eased bond yields to have higher benefit on HDFC’s cost of funds
IDFC continues to report tepid performance as it pursues transition into a bank and focuses on building up the provisioning cushion (increased to 3.6% of loans vs 3.1% in 1Q FY15) and the G‐sec portfolio (~Rs125bn currently vs ~Rs75bn in Q2 FY14). NII growth continues to moderate led by consolidation in loan growth and successive decline in spreads while operating expenses has picked up on key hiring towards transition into a bank. Asset quality has deteriorated with restructured assets amounting to 6.1% of total loans, 87% of which pertain to energy segment. We await further clarity on its strategy of operating the bank but retain our ‘Accumulate’ rating on the stock with TP of Rs175 (1.4x Sep‐16 book).
Demerger into bank on track: The board has approved the demerger scheme and all shareholders of IDFC will get shares in the bank in ratio of 1:1. Most of investments will be moved to NOHFC like AMC, Investment Banking & Alternate assets. Though in the medium term we believe operational challenges remain but its transition into a bank is well on its way as it adds key executives, focusing on regulatory requirements and build up of adequate provisions.
Asset quality has deteriorated but prudential provisioning gives comfort: Asset quality has deteriorated with restructured assets amounting to 6.1% of total loans, 87% of which pertain to energy segment. Management sighted that there could be some restructuring in gas based assets as gas price hike has been delayed (Gas based exposure stands at Rs2.4bn or 3.3% of loan book). Also, coal related exposure stands at ~5% of loan book though is not directly linked to coal mine de‐allocation and 80% of projects lent to are operational. The company intends to add provisioning buffer on prudential basis (Provisions are 3.6% of loans v/s 3.1% in Q1FY15) for all known risks as it transforms into a bank to avoid any hiccups later on.
Valuations: We await further clarity on its strategy of operating the bank but retain our ‘Accumulate’ rating on the stock with TP of Rs175 (1.4x Sep‐16 book).
1/2/2015 92
Key Financials (Rs m)
Y/e March FY13 FY14E FY15E FY16E FY17E
Net interest income 25,350 27,040 26,434 27,949 28,411
Growth (%) 22.3 6.7 -2.2 5.7 1.7
PPP 29,176 31,912 31,920 31,822 31,975
PAT 18,368 18,022 17,259 19,884 20,032
EPS (Rs) 12.1 11.9 10.6 12.3 12.3
Growth (%) 18.2 -2.0 -10.5 15.2 0.7
Net DPS (Rs) 2.6 3.1 3.7 4.5 5.4
Source: Company Data, PL Research
Profitability & valuation
Y/e March FY13 FY14E FY15E FY16E FY17E
NIM (%) 115.1 118.0 120.8 113.9 112.5
RoE (%) 14.1 12.5 10.5 10.8 10.1
RoA (%) 2.8 2.5 2.2 2.4 2.2
P / BV (x) 1.7 1.6 1.4 1.3 1.2
P / ABV (x) 1.8 1.6 1.5 1.4 1.3
PE (x) 13.0 13.3 14.8 12.9 12.8
Net dividend yield (%) 1.6 2.0 2.4 2.9 3.4
Source: Company Data, PL Research
Stock Performance
(%) 1M 6M 12M
Absolute 0.1 16.8 43.8
Relative to Sensex 3.8 9.0 13.7
LilladherPrabhudas Operating Metrics
Source: Company Data, PL Research
Source: Company Data, PL Research *Rolling chart 1 year forward on weekly basis
Loan spreads to come off gradually despite benefits of SLR/CRR
IDFC at extremely high discount v/s other NBFCs
Source: Company Data, PL Research
ROEs & FY16E Valuations of Large PSBs & Private Banks
Source: Company Data, PL Research *NBFCs were mandated to report restructured data
IDFC has reported increased restructuring in last 3 quarters
Operating profi t 29,176 31,912 31,920 31,822 31,990
Treasury ga ins - - - - -
Preprovis ion profi t 29,176 31,912 31,920 31,822 31,990
Provis ions 3,496 6,290 8,114 4,396 4,721
PBT 25,680 25,622 23,806 27,426 27,269
Taxes 7,311 7,600 6,547 7,542 7,226
PAT 18,368 18,022 17,259 19,884 20,043
Extraordinaries/Minori ty interests- - - - -
Reported PAT 18,368 18,022 17,259 19,884 20,043
PPP growth 19.8% 9.4% 0.0% -0.3% 0.5%
PAT growth 18.3% -1.9% -4.2% 15.2% 0.8%
Source: Company Data, PL Research
ROA decomposition FY13 FY14 FY15E FY16E FY17E
Net Interest Margin 4.1% 4.0% 3.8% 3.7% 3.3%
Core Fees 1.1% 1.0% 1.3% 1.2% 1.2%
Capital gains- Infra 0.4% 0.5% 0.4% 0.4% 0.4%
Treasury 0.0% 0.0% 0.0% 0.0% 0.0%
Net revenues 5.6% 5.5% 5.5% 5.3% 4.9%
Operating costs -0.9% -0.8% -0.9% -1.1% -1.1%
Provisions -0.6% -0.9% -1.2% -0.6% -0.5%
Taxes -1.2% -1.1% -0.9% -1.0% -0.8%
Costs -2.6% -2.9% -3.0% -2.7% -2.5%
ROA 3.0% 2.7% 2.5% 2.6% 2.3%
Equity/Assets 21.0% 21.2% 23.4% 24.3% 23.2%
ROE 14.1% 12.5% 10.5% 10.8% 10.1%
Adjusted ROA 1.6% 1.3% 1.0% 1.1% 0.9%
LLP/Average loans 0.7% 1.1% 1.4% 0.7% 0.7%
Source: Company Data, PL Research
0.5
1.0
1.5
2.0
2.5
3.0
De
c-0
9
Mar
-10
Jun
-10
Sep
-10
De
c-1
0
Mar
-11
Jun
-11
Sep
-11
De
c-1
1
Mar
-12
Jun
-12
Sep
-12
De
c-1
2
Mar
-13
Jun
-13
Sep
-13
De
c-1
3
Mar
-14
Jun
-14
Sep
-14
De
c-1
4
P/ABV 5 yr avg. avg. + 1 SD avg. - 1 SD
LilladherPrabhudas LIC Housing Finance
CMP: Rs438 TP: Rs490 Rating: BUY MCap: Rs221.2bn
LICHF has reported an improvement in operating performance in recent quarter with spreads improving by 6bp QoQ while GNPLs declined by 19% QoQ. Loan growth has been healthy led by the individual segment while the proportion of project loans continue to decline. Management has guided for an individual loan growth of 20-25% over next year while steep decline in funding cost is likely to aid spreads further on. We revise our PT to Rs490 which corresponds to 2.3x Sep-2016E ABV and upgrade our rating to BUY.
Spreads to improve further: In Q2FY15, spreads improved by 6bps QoQ on better loan growth especially LAP (~10‐15% QoQ disbursement growth) which led to 13bps improvement in blended yields. Funding environment has been benign in fast few months with wholesale rates softening which will be positive for LICHF spreads (already borrowing at 8.6% v/s 9.6% in Q1FY15) and robust sanctions done in Q2FY15 on builder book could add to spread improvement. Management believes margins could move to 2.75% in FY16 as about Rs280‐290bn of fixed loans re-prices upwards.
Loan growth – Disbursements & Sanctions showing good trends: Loan growth is showing signs of pick up on healthy sanctions in both individual & project loans (builder book). Though disbursements in project book has been weak the sanctions were up by 100% in Q2FY15, which may help disbursement growth in H2FY15. On the individual portfolio, disbursement growth of 24% YoY was supported by healthy disbursement in LAP of Rs4.44bn v/s 3.80bn in Q1FY15.
Asset quality to remain steady: Asset quality improved on recovery of one large a/c through auction with interest of Rs1.32bn from builder book which had become an NPA in Q3FY14. LICHF expects one more a/c of same nature to be recovered in Q4FY15/Q1FY16.
Valuation: We estimate LICHF to deliver an earnings CAGR of 24% over FY15-17E. We revise our PT to Rs490 which corresponds to 2.3x Sep-2016E ABV and upgrade our rating to BUY.
1/2/2015 95
Key Financials (Rs m)
Y/e March FY13 FY14 FY15E FY16E FY17E
Net interest income 15,463 19,158 22,219 28,815 35,485
Growth (%) 10.3 23.9 16.0 29.7 23.1
PPP 13,812 17,106 19,877 26,322 32,807
PAT 10,232 13,172 15,156 18,730 23,220
EPS (Rs) 20.3 26.1 30.0 37.1 46.0
Growth (%) 8.6 28.7 15.1 23.6 24.0
Net DPS (Rs) 4.4 5.3 4.9 5.3 5.3
Source: Company Data, PL Research
Profitability & valuation
Y/e March FY13 FY14 FY15E FY16E FY17E
NIM (%) 89.3 89.3 89.5 91.3 92.5
RoE (%) 16.8 18.8 18.6 19.5 20.3
RoA (%) 1.4 1.5 1.4 1.5 1.5
P / BV (x) 3.4 2.9 2.5 2.1 1.8
P / ABV (x) 3.6 3.1 2.6 2.2 1.9
PE (x) 21.6 16.8 14.6 11.8 9.5
Net dividend yield (%) 1.0 1.2 1.1 1.2 1.2
Source: Company Data, PL Research
Stock Performance
(%) 1M 6M 12M
Absolute 3.8 35.5 97.9
Relative to Sensex 7.5 27.7 67.8
LilladherPrabhudas Operating Metrics
Source: Company Data, PL Research
Source: Company Data, PL Research
..which will help COFs on higher wholesale funding reliance..
We expect ROEs to improve from hereon
Source: Company Data, PL Research
…but historically margins have expanded on higher project book mix
Source: Bloomberg, PL Research
LICHF’s recent bond offering is lower by at least 150bps over last year..
1/2/2015 96
Bank loans23.0%
NCDs
67.0%
NHB 5.0%
Others5.0%
2.5% 2.4% 2.8%
2.8%
2.6%
3.0%
2.3%
2.1% 2.2%
95.9
%
96.9
%
94.0
%
91.2
%
89.1
%
91.5
%
95.0
%
96.6
%
97.0
%
4.1% 3.
1%
6.0%
8.8%
10.9
% 8.5%
5.0% 3.
4% 3.0%
1.5%
1.7%
1.9%
2.1%
2.3%
2.5%
2.7%
2.9%
3.1%
85%
87%
89%
91%
93%
95%
97%
99%
101%
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
Individual Book Non-Housing Book NIMs
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
22.0%
24.0%
26.0%
28.0%
FY06
FY
07
FY08
FY09
FY
11
FY12
FY13
FY14
FY15
E
FY
16
E
FY17
E
ROEs
10.6
9.7
8.7
8.5
8.8
9.1
9.4
9.7
10.0
10.3
10.6
10.9
Jul-
13
Au
g-1
3
Sep
-13
Oct
-13
Nov
-13
Dec
-13
Jan
-14
Feb
-14
Mar
-14
Apr
-14
Ma
y-1
4
Jun-
14
Jul-
14
Aug
-14
Sep
-14
Oct
-14
Nov
-14
Dec
-14
Interest on Corp Bond Offered By LICHF
LilladherPrabhudas Financials
Source: Company Data, Bloomberg, PL Research
P/BV
1/2/2015 97
ROA Decomposition FY12 FY13 FY14 FY15E FY16E
NII 2.5% 2.2% 2.3% 2.3% 2.4%
Fees and other income 0.4% 0.3% 0.3% 0.3% 0.3%Total income 2.8% 2.5% 2.6% 2.6% 2.7%
Disbursement growth to be flattish to negative in FY15: MMFS is likely to witness flattish to negative growth in disbursements in FY15E as Auto/Cars/UVs (50% of AUM) have seen only some festive demand but overall has remained sluggish. Disbursement in H2FY15 was driven by used vehicles portfolio & some rebound in CV disbursements. The management is focusing on tractors (18% of AUM) which is high yielding and is having better demand (M&M commands high market share in tractors sales).
Asset quality improvement unlikely in near term: Asset quality for MMFS has deteriorated in Q1FY15 on several factors like delayed monsoon, election activity in country & states and economic slowdown. RBI also undertook revision in NPA recognition norms for NBFCs to 90days from 180 days currently (have to align by FY18). As MMFS is already on 150 day recognition cycle impact will be only 2% incremental over the ~6% GNPAs as of H1FY15, as the NBFC is likely to start moving towards 120 day recognition on commencement of FY16. We believe, asset quality to improve only gradually as collection efforts have increased but economic activity remains very soft.
Margins to remain stable: MMFS borrows ~28% of its funding from wholesale market, while 65% of funding is via banks & fixed deposits. While, wholesale rates have reduced by 200bps from Aug’13 incremental benefit to MMFS will be only 20-22bp which is likely to be passed on to borrowers on tepid demand. Hence, we believe, margins are likely to remain stable in the near term unless growth picks up materially.
Prospects improving gradually: Management has clearly been indicating growth is likely to be high effort based and will be slow & gradual. MMFS has geared up for opportunities on further penetration in rural markets, but asset quality improvement is unlikely under revised norms scenario and lower loan growth will keep return ratios below normalized levels. Hence, we maintain Reduce but we revise our TP of Rs300 from Rs255 (2.5x Sep-16 book).
1/2/2015 98
Key Financials (Rs m)
Y/e March FY13 FY14E FY15E FY16E FY17E
Net interest income 22,380 27,336 31,019 37,123 44,285
Growth (%) 35.8 22.1 13.5 19.7 19.3
PPP 15,340 18,516 20,590 24,742 29,264
PAT 8,541 8,872 8,995 11,061 13,938
EPS (Rs) 15.2 15.7 16.0 19.6 24.7
Growth (%) 25.6 3.8 1.4 23.0 26.0
Net DPS (Rs) 3.6 3.8 3.6 4.4 5.6
Source: Company Data, PL Research
Profitability & valuation
Y/e March FY13 FY14E FY15E FY16E FY17E
NIM (%) 68.5 67.7 66.4 66.6 66.1
RoE (%) 23.1 18.6 16.6 17.9 19.7
RoA (%) 4.2 3.4 2.9 3.0 3.1
P / BV (x) 4.2 3.6 3.2 2.8 2.4
P / ABV (x) 4.4 4.1 3.8 3.3 2.9
PE (x) 21.7 20.9 20.7 16.8 13.3
Net dividend yield (%) 1.1 1.2 1.1 1.3 1.7
Source: Company Data, PL Research
Stock Performance
(%) 1M 6M 12M
Absolute 8.0 15.5 3.0
Relative to Sensex 11.6 7.7 (27.2)
LilladherPrabhudas Operating Metrics
Source: Company Data, PL Research
Source: Company Data, PL Research
Funding cost benefit from wholesale rate easing to be lower
MMFS’s entered NPL cycle later on buoyant rural economy, unlike STFC
Source: Company Data, PL Research
Hurdles in collection efforts have hurt asset quality
Source: Company Data, PL Research
Overlap of customers have increased with Banks/Other NBFCs
1/2/2015 99
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
GNPAs % Collections growth YoY (LHS)
Bonds / NCDs18.7%
CPs9.3%
FDs15.8%
Securitisation
7.6%
Bank
48.6%
0%
10%
20%
30%
40%
50%
60%
70%
80%
Overlap in customers with
Banks/NBFCs
PDC/ECS collections Overlap of branches with
Banks/NBFCs
FY09 Now
2.0%
2.2%
2.4%
2.6%
2.8%
3.0%
3.2%
3.4%
3.6%
3.8%
4.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
4Q
09
1Q
10
2Q
10
3Q
10
4Q
10
1Q
11
2Q
11
3Q
11
4Q
11
1Q
12
2Q
12
3Q
12
4Q
12
1Q
13
2Q
13
3Q
13
4Q
13
1Q
14
2Q
14
3Q
14
4Q
14
1Q
15
2Q
15
MMFS GNPAs % (LHS) STFC GNPA %
LilladherPrabhudas Financials
Source: Company Data, Bloomberg, PL Research
P/BV
1/2/2015 100
ROA decomposition (% of AUM) FY13 FY14E FY15E FY16E FY17E
Net Interest Income 8.3% 8.1% 7.8% 8.0% 7.9%
Interest on Securitisation 0.9% 0.7% 0.7% 0.7% 0.6%
Other income 0.2% 0.1% 0.1% 0.1% 0.1%
Net revenues 9.4% 8.9% 8.6% 8.8% 8.7%
Operating expenses 3.0% 2.9% 2.9% 3.0% 2.9%
Depreciation 0.1% 0.1% 0.1% 0.0% 0.1%
PPOP 6.3% 6.0% 5.6% 5.8% 5.7%
Provis ions and Contingencies 1.2% 1.6% 2.0% 2.0% 1.7%
PBT 5.2% 4.3% 3.6% 3.8% 4.0%
Provis ion for Tax 1.6% 1.5% 1.2% 1.2% 1.3%
ROA 3.5% 2.9% 2.5% 2.6% 2.7%
Equity/Assets 15.3% 15.4% 14.9% 14.5% 13.7%
ROE 23.8% 18.6% 16.6% 17.9% 19.7%
Source: Company Data, PL Research
1.0
1.5
2.0
2.5
3.0
3.5
4.0
De
c-0
9
Mar
-10
Jun
-10
Sep
-10
De
c-1
0
Mar
-11
Jun
-11
Sep
-11
De
c-1
1
Mar
-12
Jun
-12
Sep
-12
De
c-1
2
Mar
-13
Jun
-13
Sep
-13
De
c-1
3
Mar
-14
Jun
-14
Sep
-14
De
c-1
4
P/ABV 5 yr avg. avg. + 1 SD avg. - 1 SD
Income Statement (Rs m)
Y/e March FY13 FY14E FY15E FY16E FY17E
Net interest income 20,234 25,014 28,605 34,229 41,040
Growth (%) 30.1 23.6 14.4 19.7 19.9
Non interest income 380 314 361 415 477
Net operating income 22,759 27,650 31,379 37,538 44,762
Employees 3,616 4,729 5,674 6,809 8,171
Other expenses 511 511 511 511 511
Total expenditure 4,350 5,483 6,430 7,463 8,996
PPP 15,340 18,516 20,590 24,742 29,264
Growth (%) 41.7 20.7 11.2 20.2 18.3
Provis ion 2,833 5,058 7,363 8,476 8,767
Other income - - - - -
Profi t before tax 12,506 13,458 13,227 16,266 20,497
We expect SHTF to be a key beneficiary of much anticipated revival in CV cycle while steep decline in corporate bond-yields help improve company's profitability. We expect credit-cost also to moderate from current levels while strong coverage ratio will help preempt any earnings shock as company migrates to a 90day NPA recognition norm.
Growth to recovery gradually; freight operators economics likely to improve: Disbursements have shown an uptick in recent months and with the improvement in macro-environment we expect CV cycle to stage a gradual recovery over FY16. Though the recent cut in diesel prices has not helped freight operators much due to weak demand, we expect transport operators profitability to improve going ahead. Management expects double digit AUM growth in H2FY15 which will help improve margins.
Margins likely to improve: SHTF’s reported margins have been under pressure over past few quarters at ~6.5%. This occurred due to a decline in off-balance sheet mix, excess liquidity on balance sheet and increased focus on used vehicles of 2–5 years vintage which have lower yields. Going ahead, we expect margins to recover to ~7.5% (6.6% in Q2FY15) as lending activity in the used business picks up and funding cost moderates.
Asset quality stable; healthy provisioning comforts us: Asset quality was stable in Q2FY15 as stress seems to be abating especially in South India where economic prospects have started looking good. But credit cost remains high in range of 200‐210bps on some movement to lower NPA buckets. Management has indicated sufficient buffers (79% PCR) exist as SHTF migrates to 90 day NPA recognition norm as required by the RBI.
Valuation: We maintain our ACCUMULATE rating on the stock with a PT of Rs1,200 which corresponds to 2.3x Sep-2016E ABV. Improving/stabilizing return ratios, resumption of mining activity, revival in CV cycle and improvement in NPL formation are the key triggers. Key risks: Rising competition with banks and CV cycle failing to revive would adversely affect SHTF’s business growth and asset quality.
1/2/2015 101
Key Financials (Rs m)
Y/e March FY13 FY14 FY15E FY16E FY17E
Net interest income 32,894 34,226 36,971 46,088 57,425
Growth (%) 9.8 4.0 8.0 24.7 24.6
PPP 28,613 28,574 30,491 38,460 48,297
PAT 13,606 12,642 13,923 16,670 20,372
EPS (Rs) 60.0 55.7 61.4 73.5 89.8
Growth (%) 7.9 -7.1 10.1 19.7 22.2
Net DPS (Rs) 7.0 7.0 7.7 10.0 12.2
Source: Company Data, PL Research
Profitability & valuation
Y/e March FY13 FY14 FY15E FY16E FY17E
NIM (%) 87.0 83.5 82.5 83.4 84.1
RoE (%) 20.6 16.3 15.7 16.4 17.4
RoA (%) 4.0 3.1 3.0 3.1 3.1
P / BV (x) 3.5 3.0 2.6 2.3 2.0
P / ABV (x) 3.6 3.1 2.8 2.4 2.2
PE (x) 18.4 19.8 18.0 15.0 12.3
Net dividend yield (%) 0.6 0.6 0.7 0.9 1.1
Source: Company Data, PL Research
Stock Performance
(%) 1M 6M 12M
Absolute (1.3) 21.9 64.0
Relative to Sensex 2.4 14.1 33.9
LilladherPrabhudas Operating Metrics
Source: IFTRT, PL Research
Source: Company Data, PL Research
Freight rates have moved downwards on monthly basis
GNPAs should move downwards by FY18E post complete move on 90dpd
Source: Company Data, PL Research
NIMs should improve as AUM growth picks-up
Source: PL Research
Demand for 35 ton vehicle has improved fleet profitability
1/2/2015 102
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
Aug
-13
Sep
-13
Oct
-13
Nov
-13
Dec
-13
Jan
-14
Feb
-14
Mar
-14
Ap
r-1
4
May
-14
Jun-
14
Jul-
14
Aug
-14
Sep
-14
Oct
-14
Freight rates movement (YoY) Freight rates movement (MoM) - (RHS)
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
FY08
FY09
FY
10
FY11
FY12
FY13
FY14
FY
15
E
FY16
E
FY17
E
FY18
E
FY19
E
FY
20
E
GNPAs Provision Coverage (RHS)
Distance (kms) 1410 1410 1410
Vehicle 16T 25T 35T
Running Trips 3.5 4 4
Monthly running 4935 5640 5640
Load (Tonnes) 9 16 25
Rate/ tonne/km 2.4 2.2 2.1
Total Revenues 129,021 202,138 292,152
Mileage (km/litre) 5 3.6 2.5
Cost of Diesel (Rs./Litre) 58 58 58
Diesel Cost 57,246 90,867 130,848
Total operating cost (Ex Tolls) 74,590 104,709 136,960
BUY : Over 15% Outperformance to Sensex over 12-months
Accumulate : Outperformance to Sensex over 12-months
Reduce : Underperformance to Sensex over 12-months
Sell : Over 15% underperformance to Sensex over 12-months
Trading Buy : Over 10% absolute upside in 1-month
Trading Sell : Over 10% absolute decline in 1-month
Not Rated (NR) : No specific call on the stock
Under Review (UR) : Rating likely to change shortly
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