We see banks? overall earnings growth slowing to 14% year-on-year with public banks growing 12% y-o-y (ex-SBI by 7% y-o-y) and private banks 19% y-o-y as revenue growth is slowing and overall provisions are high. We believe interest rates are unlikely to decline sharply, stress on the balance sheet is yet to peak as we see impairments from infrastructure, and revenue growth may be challenging.
We believe the recent run-up in prices of financial stocks, especially banks, is an attractive opportunity to reduce exposure. We downgrade Punjab National Bank (PNB) to Reduce (from Add) and Oriental Bank of Commerce (OBC) to Add (from Buy). We downgrade HDFC Bank to Sell (from Reduce) as we find valuations expensive at 3.6x (times) book value and 18x FY2014e EPS. We see RoEs (return on equity) of 18-19% and earnings growth of 25% CAGR over FY2012-14e. Further, we revise our target price for HDFC Bank to R580 from (R575 earlier). On the other hand we like ICICI Bank, Federal Bank and SBI at current levels despite limited upside.
Asset quality pressure to continue: We expect fresh loan impairments (slippages and restructuring of loans) at elevated levels in Q2FY13. Retail-focused banks could probably see a marginal rise in NPLs (non-performing loans) but the focus would continue in the non-retail loan dominated portfolios in which we expect slippages to stay high, especially SME and mid-corporate loans. However, fresh restructuring is likely to be relatively lower than the previous quarter as we don?t expect large restructuring from the SEB (state electricity board) portfolio across banks (50% have already been restructured), especially with the restructuring package just being announced.
Recovery trends will marginally improve sequentially as the focus has shifted to strengthening the balance sheet. We maintain a fairly cautious outlook about asset quality and expect overall loan-loss provisions to remain elevated (20% y-o-y). Public banks would be relatively lower (16% y-o-y) as the movement towards a stringent NPL recognition platform peaked in Q2FY12 resulting in significantly higher provisions.
Margins to remain under pressure: We broadly expect margins (NIMs) to remain under pressure (+/-10 bps) in the current quarter though wholesale banks should start witnessing marginal benefit from the recent decline in short-term rates. The full impact of base rate reduction taken in May 2012 should be reflected in the current quarter and select banks have been reducing their underlying spreads across products to ease the strain on corporates.
We expect ICICI Bank and HDFC Bank to report stable margin q-o-q. Axis Bank, Yes Bank and IndusInd Bank should report marginal improvement in NIM q-o-q largely on the back of lower cost of funds and run-off of PSL (priority sector lending) portfolio. Amongst public banks we expect OBC, Corporation Bank and BoI to report higher NIM while most of the other banks to report stable/marginal decline in NIM.
Non-interest income to grow 11% y-o-y; core fee income growth muted: We expect overall non-interest income to grow 11% y-o-y (up 4% q-o-q) primarily due to higher contribution from treasury income. Core fee income growth would be muted as corporate activity remains subdued. ICICI Bank and Axis Bank are likely to continue to report a weak performance.
NBFCs: Loan growth to stay strong, margins stable: We expect most NBFCs (non-bank financial companies) to report stable operating performance in Q2FY13: 20-30% loan growth?almost stable margins q-o-q driving 25-30% growth in core earnings. Most retail asset classes reported stable collections/NPLs though we expect NBFCs to accelerate provisions in the light of a tighter regulatory framework. Improved monsoons provide comfort to rural-focused NBFCs.
After a seasonally weak Q1FY13, we expect business traction to pick-up in Q2FY13. However, the H2FY13 is crucial for most consumption-linked plays as a pick-up in traction in infrastructure development after the monsoons boosts demand for construction during H2FY13.
Asset finance companies with fixed-rate asset book (Shriram Transport, Mahindra Finance and Shriram City Union Finance) will be key beneficiaries of improving liquidity. We prefer IDFC and LIC Housing Finance in the infrastructure finance and housing finance segments. We find moderate upside after rolling over price targets of NBFCs to September 2013.
High high traction will help IDFC to accelerate loan growth to 33%.
Mahindra Finance may deliver 33% loan growth due to 40% loan growth in FY2012 and 37% loan growth in Q1FY13. Improvement in the monsoon offers a respite even as the next three months remain crucial.
Demand for housing remains weak. Business in smaller towns will drive volumes for housing finance companies.
Gold loan companies? guidance is for a stable loan book.
?Kotak Institutional Equities
