Indian Financials. Darkest before dawn! Pathik Gandotra / Chinmaya Garg / Kavita Kejriwal

Transcription

1 Indian Fancials Darkest before dawn! Pathik Gotra / Chmaya Garg / Kavita Kejriwal (Tel): / 2563/ 2558 pathik.gotra@idfc.com/chmaya.garg@idfc.com/kavita.kejriwal@idfc.com February 2011

2 A rrent of bad news!!! 1 Persistent flation Inflation refuses relent 2 3 Liquidity crunch Monetary tighteng by the RBI WPI (LHS) yoy (% - RHS) Multitude of scams brought corruption the forefront Government spendg reforms ok a hit 130 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Source: CSO 0 RBI on a tighteng spree Liquidity deficit assumes worrisome proportions 7 CRR Reverse Repo Repo Rate 500 Repo amt (Rs bn) G-Sec 10yr yields (%) Mar-10 Jun-10 Sep-10 Dec-10 Source: RBI ` Repo rate up 175bp sce Mar ,000-1,500-2,000 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Source: Bloomberg

3 Invesr sentiment takes a beatg 21,500 CBI begs vestigation on the 2G scam IIP slows down 2.7% November 2010 Food flation creases 18.3% December ,500 19,500 Home loan scam raises concerns on corporate governance Down 10% just 3 months RBI hikes repo reverse repo by 25bp 18,500 Liquidity tightens as deposit growth lags credit growth Net FII outflows at US$1bn Jan ,500 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Source: Bloomberg 3

4 fancials have been hit harder 110 Sensex BANKEX Index PSU s 100 s corrected by 25-30% from peak, underperformed the Sensex sce Nov Nov-10 Nov-10 Dec-10 Dec-10 Jan-11 Jan-11 Feb-11 Source: Bloomberg 1 Higher terest rates liquidity crunch risg costs 2 3 Microfance, 2G telecom real estate exposures under scanner Deterioratg earngs outlook persistent delquencies a likely stress on margs 4

5 Rise fundg cost mars banks earngs outlook Short-term terest rates have uched 2-year highs (%) 11 3 mnth CP 6 mnth CP Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Source: Bloomberg Fundg costs have creased at a scorchg pace bulk rates up ~350bp six months Fundg costs have creased at a scorchg pace bulk rates up ~350bp six months NIMs, hence core earngs, come under stress? 5

6 Asset quality improvement: Slower than expected Rs m Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 All banks Slippages 84,650 91, , ,834 88,194 % of openg advances 1.72% 1.80% 1.81% 1.84% 1.46% PSU banks Slippages 68,755 80,452 78,959 93,664 81,484 % of openg advances 1.86% 2.08% 1.88% 2.14% 1.79% PSU banks (ex-sbi) Slippages 46,277 55,412 38,149 49,544 42,484 % of openg advances 2.06% 2.36% 1.47% 1.83% 1.51% Private Private banks banks display display resilience resilience As As per per RBI s RBI s recent recent provisiong provisiong norms, norms, NBFCs NBFCs make make higher higher provisions provisions Decle Decle delquencies delquencies lag lag expectations expectations (especially (especially for for PSU PSU banks); banks); only only a a margal margal fall fall so so far far Gross NPA (%) Q3FY10 Q2FY11 Q3FY11 Allahabad Axis of Baroda of India Canara Corporation Dhanlaxmi HDFC HDFC ICICI Indian IndusInd ING Vysya LIC Housg M&M Fance OBC PFC PNB Shri Ram Transport State of India Union of India Yes Spate of news flow on microfance, telecom & real estate accentuates concerns 6

7 Valuations 25-30% off the peaks... Axis 1 yr fwd P/B (x) HDFC 1 yr fwd P/B (x) 5.0 Axis PB (x) Average 6.0 HDFC PB (x) Average Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 SBI 1 yr fwd P/B (x) 0.0 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 ICICI 1 yr fwd P/B (x) 2.5 SBI PB (x) Average 4.0 ICICI PB (x) Average Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Source: IDFC Research estimates, companies, Bloomberg 7

8 now prevailg at long-term averages Allahabad 1 yr fwd P/B (x) Punjab National 1 yr fwd P/B (x) 1.6 Allahabad BK PB (x) Average 2.50 PNB PB (x ) Average Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Yes 1 yr fwd P/B (x) 0.00 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Union 1 yr fwd P/B (x) Yes PB (x) Average Union PB (x) Average Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 8

9 Are banks barga bets now? We see the tide turng 1 Systemic liquidity has improved, further easg likely next couple of months 2 Inflation seems have peaked 3 Policy rate hikes expected be calibrated 4 Earngs rema robust led by declg provisions; concerns on NIMs appear exaggerated 5 Valuations now offer a considerable marg of safety Turng OVERWEIGHT on the secr 9

10 Systemic liquidity: Some relief visible Higher rates have led improved deposit flows Deposits (Rs bn) yoy grow th (%) 52,000 49,000 46,000 43,000 40,000 Apr-10 Jun-10 Aug-10 Nov-10 Jan-11 Source: RBI leadg easg of cremental CD ratio Deposit growth(%) Credit Growth (%) YTD cremental CD ratio down 95% from 108% Dec-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Source: RBI Government cash balances with RBI have come off (Rs bn) 1,200 LAF balances o off the peak 500 Repo amt (Rs bn) , Dec 17-Dec 24-Dec 31-Dec 7-Jan 14-Jan 21-Jan 28-Jan 4-Feb -1,500-2,000 1-Nov 16-Nov 1-Dec 16-Dec 31-Dec 15-Jan 30-Jan Source: RBI Source: RBI 10

11 situation turn benign next 2-3 months Seasonal decle High rates ensure credit dem from April Deposit growth robust deposit flows 2011 outstrip credit growth Hisrically liquidity conditions have eased the begng of each fiscal year 1,500 LAF balances (Rs bn) (750) (1,500) Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 While liquidity may tighten March, it is expected be only temporary 11

12 Inflation likely have peaked Food prices spurt; flationary concerns return but rise manufacturg flation still under control WPI % (LHS) Primary articles flation (% - RHS) Manufacturg Inflation(%) Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Inflation Inflation likely likely decle decle as: as: Recent Recent policy policy rate rate hikes hikes will will keep keep manufacturg manufacturg flation flation under under control control Food Food flation flation soften soften from from its its peak peak levels, levels, recent recent weekly weekly food food flation flation dicates dicates a a decle decle Declg Declg flation flation moderatg moderatg growth growth impel impel RBI RBI calibrate calibrate policy policy rate rate hikes hikes gog gog forward forward Inflation expected decle hereon Index WPI % (LHS) 11.0 RBI sees flation at 7% by Mar-11E Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Mar-11E Macro dicars start turng favorable 12

13 Pessimism on earngs overdone: NIMs susta Lendg rates have been creased PNB base rate (%) Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Source: Bloomberg Lendg Lendg rates rates have have been been creased creased response response Increase Increase short-term short-term rates rates Recent Recent policy policy rate rate hikes hikes Margs Margs susta susta as as loans loans gets gets repriced repriced faster faster than than deposits deposits We see steady margs FY12 Liquidity Liquidity also also ease ease from from April April 2011, 2011, drivg drivg a a steep steep decle decle wholesale wholesale borrowg borrowg costs costs Lower Lower bulk bulk rates rates support support margs margs All banks PSU s Private s FY09 FY10 FY11E FY12E Source: IDFC Securities 13

14 Pessimism on earngs overdone: Provisions fall Provisiong expenses have decled sequentially (%) Annualized Provisiong All s Private s PSU s 1.40 Gross NPAs have started comg off Gross NPA (%) Q4FY10 Q1FY11 Q2FY11 Q3FY % % % % 0.00 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY % All s Private s PSU s Source: IDFC Securities estimates (Annualized provision average assets) Source: IDFC Securities estimates Stress remas only pockets Expect provisiong expenses taper FY12E* Rs m Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 All banks Slippages 84,650 91, , ,834 88,194 % of openg advances 1.72% 1.80% 1.81% 1.84% 1.46% (%) All banks PSUs Private s PSU banks see a sharper decle PSU banks Slippages 68,755 80,452 78,959 93,664 81, % of openg advances 1.86% 2.08% 1.88% 2.14% 1.79% PSU banks (ex-sbi) 0.30 Slippages 46,277 55,412 38,149 49,544 42,484 % of openg advances 2.06% 2.36% 1.47% 1.83% 1.51% Source: IDFC Securities estimates company reports 0.00 FY07 FY08 FY09 FY10 FY11E FY12E Source: IDFC Securities estimates, * (Provision average assets) 14

15 Earngs momentum be sustaed PAT (Rs bn) FY10 FY11E FY12E CAGR (%) Allahabad Axis Bajaj Au Fance of Baroda of India Canara Corporation Dhanlaxmi HDFC HDFC ICICI Ltd Indian IndusInd ING Vysya Ltd LIC Housg Fance MMFS OBC PFC PNB REC Shri Ram Transport Shriram City Union Fance State of India Union of India Largely steady margs Largely steady margs + Healthy credit dem Healthy credit dem + Provisions decle Provisions decle + Fee Fee come come driven driven by by higher higher credit credit offtake offtake Yes All banks PSU banks Private s NBFCs Expect Expect 25% 25% yoy yoy PAT PAT growth growth FY12 FY12 15

16 16 s - In the last leg of correction?

17 Valuations have become reasonable Price Target Earlier New Mkt Cap 14th Feb 2011 Adj Book value (Rs) Price (Rs) Reco Reco (Rs bn) FY11E FY12E EPS cagr RoE (%) PE (x) P/Adj. Book Value FY10- FY12 FY11E FY12E FY11E FY12E FY11E FY12E PSU s Allahabad UP OP of Baroda 897 1,250 OP OP of India UP OP Canara UP OP Corporation UP OP Indian UP OP OBC UP OP Punjab National 1,060 1,410 OP OP State of India 2,698 3,360 UP OP 1,713 1,470 1, Union of India UP OP Pvt s Axis 1,270 1,700 OP OP Dhanlaxmi 106 na OP OP HDFC 2,105 2,610 OP OP ICICI 1,034 1,450 OP OP 1, IndusInd 220 na OP OP ING Vysya OP OP Yes OP OP NBFCs Bajaj Au Fance OP OP HDFC OP OP LIC Housg Fance OP OP Mahdra Fance OP OP Power Fance OP OP Rural Electrification OP OP Shri Ram Transport 698 1,000 OP OP Shriram City Union OP OP

18 We turn OVERWEIGHT on the secr Recommend Recommend addg addg weights weights PSU PSU bank bank scks scks correction correction Valuations Valuations have have corrected corrected by by 25%+, 25%+, now now at at attractive attractive levels levels Earngs Earngs momentum momentum susta susta as as provisions provisions come come off, off, a a function function of of recedg recedg asset asset quality quality stress stress Marg Marg compression compression likely likely be be lower lower than than estimates estimates Private Private banks banks NBFCs NBFCs offer offer value value Sensible Sensible loan loan growth growth strategy strategy with with focus focus on on profitability profitability Sustaed Sustaed traction traction core core earngs earngs Valuations Valuations have have corrected corrected significantly significantly Our Our p p picks: picks: ICICI ICICI Axis Axis IndusInd IndusInd ING ING Vysya Vysya Shriram Shriram Transport, Transport, Bajaj Bajaj Fance, Fance, of of Baroda, Baroda, Canara Canara OBC OBC Yes Yes Global commodity prices persistent food flation rema key risks our call Global commodity prices persistent food flation rema key risks our call 18

19 19 Indian s: The quarter gone by

20 Q3FY11 earngs: Key themes PAT le with estimates Our fancials universe net profit was up by strong 22% yoy, le with our estimates Growth stronger for private banks 35% yoy 18% qoq rise Public banks growth lower at 18% yoy 12% qoq due higher provisiong expenses & lower opex Strong NII performance NII growth at 36% yoy 9% qoq for our coverage universe was margally ahead of estimates. Strong performance was led by Uptick credit growth : Up ~6% qoq Q3FY11, broad based growth across secrs as margs exp qoq: Uptick qoq for almost all banks except wholesale funded banks few NBFCS), as rise lendg rates mitigate impact of higher fundg costs Muted other come Sluggish growth at 3% yoy 1% qoq decle Low treasury come due elevated G-Sec yields Subdued fee commissions come for PSU banks due low transaction bankg fees Forex come witnesses traction for select banks Provision expenses asset quality divergent trends NBFCs makes higher provisiong expenses impacted by chances recent RBI norms Private banks mata resilient asset quality; provision expenses decle by 16% qoq Slippages for PSU banks persist at elevated levels Operatg expenses Higher than estimates as PSU banks make higher provisions for second pension options Robust operatg performance, but delquencies persist 20

21 Outliers at a glance Key monirables Comment Positive outliers Negative outliers Margs (NIM) Margs surprise on the upside - crease loan yields more than offset higher fundg costs Rise CD ratios vestment yields BoI higher loan yields lower slippages BoB rise domestic ternational margs Shriram Transport Decle costs of funds MMFS, OBC ING Vysya qoq decle as costs of funds ched up Credit dem/ Disbursements Uptick loan growth, broad based growth ICICI uptick retail loans Axis driven by large mid corp MMFS Strong busess volumes Corp OBC 3% qoq rise Yes le with sluggish deposit growth NPAs loan loss provisions Margal decle PSU banks slippages, the pace of improvement remas slow Pvt bank display higher resilience High provisiong expenses for NBFCs wrt new RBI norms Axis ING Vysya HDFC Stable gross NPAs Canara of India - Decle slippages PSU banks report high slippages - Allahabad, Corporation PNB, Union SBI Fee come Sluggish treasury come Muted transaction processg fees Uptick forex fee come HDFC higher vestment sale come Axis traction corporate fees IndusInd - Uptick IB fees ING Vysya Traction wealth management forex come CEB sluggish across PSU banks Canara Allahabad Union SBI CASA Stable for most banks after the high crease witnessed Q2FY11, though current deposits decle on tight systemic liquidity Axis & ICICI - robust crease savgs deposits IndusInd Allahabad Dhanlaxmi ING Vysya 21

22 s earngs have exhibited traction Net Interest Income Operatg profit PAT Rs m Q3FY11 yoy growth (%) Q3FY11 yoy growth (%) Q3FY11 yoy growth (%) Allahabad 10, , , Axis 17, , , Bajaj Au Fance 2, , of Baroda 22, , , of India 19, , , Canara 21, , , Corporation 8, , , Dhanlaxmi HDFC 10, , , HDFC 27, , , ICICI 23, ,428 (1.1) 14, Indian 10, , , IndusInd 3, , , ING Vysya Ltd 2, , LIC Housg Fance 3, , , MMFS 3, , , OBC 10, , , PFC 9, , , PNB 32, , , Shri Ram Transport 8, , , Shriram City Union Fance 2, , State of India 90, , , Union of India 16, , , Yes 3, , , All s 320, , , Private s 78, , , PSU s 242, , , NBFCs 48, , , Operatg metrics displayed strength, with NIMs expg for most banks under our coverage 22

23 Strong NII performance Net Interest Income (Rs m) Q3FY10 Q2FY11 Q3FY11 yoy change (%) qoq change (%) Allahabad 6,756 9,692 10, Axis 13,492 16,151 17, Bajaj Au Fance 1,940 2,370 2, of Baroda 16,012 20,381 22, of India 14,948 17,761 19, Canara 14,778 20,033 21, Corporation 5,994 7,153 8, Dhanlaxmi HDFC- pre exceptional 8,952 10,845 10, (1.0) HDFC 8,952 10,845 10, (1.0) HDFC Ltd 22,239 25,263 27, ICICI Ltd 20,581 22,044 23, Indian 8,730 9,832 10, IndusInd 2,377 3,297 3, ING Vysya Ltd 2,194 2,542 2, (3.3) LIC Housg Fance 2,280 3,051 3, MMFS 2,578 3,178 3, OBC 8,729 10,771 10, (4.4) PFC 7,460 8,960 9, PNB 22,123 29,767 32, Shri Ram Transport 5,840 7,527 8, Shriram City Union Fance 1,472 1,799 2, State of India 63,163 81,149 90, Union of India 10,647 15,358 16, Yes 2,109 3,132 3, All s 235, , , Private s 63,384 72,956 78, PSU s 171, , , NBFCs 36,774 45,530 48, Positive Positive surprises: surprises: SBI, SBI, Allahabad Allahabad BoI, BoI, IndusInd IndusInd Shriram Shriram transport transport Negative Negative surprise: surprise: OBC, OBC, Yes Yes Led Led by by robust robust 26% 26% yoy yoy credit credit growth growth Positive Positive marg marg surprise surprise 23

24 as margs held up NIMs (%) Q3FY10 Q2FY11 Q3FY11 yoy change (bps) qoq change (bps) Allahabad Axis (16) 9 Bajaj Au Fance (17.8) 4.4 of Baroda of India Canara Corporation Dhanlaxmi HDFC (15) HDFC Ltd (2) 26 ICICI Ltd Indian (7) 1 IndusInd ING Vysya Ltd (18) (23) LIC Housg Fance MMFS (68) (63) OBC (21) PFC (7) (1) PNB Shri Ram Transport Shriram City Union Fance State of India Union of India Yes (53) (22) All s Private s PSU s NBFCs *NIMs calculated on average quarterly balances Positive Positive surprise: surprise: SBI, SBI, of of India, India, PNB, PNB, IndusInd IndusInd & Shriram Shriram Transport Transport Negative Negative surprise: surprise: Yes Yes ING ING Vysya Vysya Mahdra Mahdra Fance Fance Margs Margs exp exp 11bp 11bp qoq qoq NIMs NIMs exp exp by by ~10bp ~10bp qoq qoq for for banks banks as as crease crease lendg lendg rates rates more more than than offset offset rise rise fundg fundg costs costs Wholesale Wholesale funded funded banks banks NBFCs NBFCs witnessed witnessed marg marg compression compression 24

25 credit off-take gaed traction Total Advances (Rs bn) Q3FY10 Q2FY11 Q3FY11 yoy change (%) qoq change (%) Allahabad Axis 848 1,106 1, Bajaj Au Fance of Baroda 1,562 1,930 2, of India 1,570 1,814 1, Canara 1,474 1,761 1, Corporation Dhanlaxmi HDFC 989 1,063 1, HDFC 1,196 1,571 1, ICICI 1,793 1,942 2, Indian IndusInd ING Vysya Ltd LIC Housg Fance MMFS OBC PFC PNB 1,704 2,088 2, Shri Ram Transport Shriram City Union Fance State of India 6,072 6,932 7, Union of India 1,065 1,241 1, Yes All s 20,464 24,284 25, Private s 4,434 5,430 5, PSU s 16,031 18,854 20, NBFCs 3,018 3,476 3, Positive Positive surprise: surprise: Axis Axis ICICI ICICI Union Union Negative Negative surprise: surprise: OBC, OBC, Corporation, Corporation, Yes Yes Growth Growth was was broad broad based based traction traction large large corporate, corporate, SME SME agriculture agriculture loans loans Housg Housg au au loans loans drive drive growth growth retail retail advances advances ICICI ICICI bank bank witnessed witnessed traction traction credit credit off-take off-take at at 6% 6% qoq qoq 25

26 Muted other come Non tradg come Q3FY10 Q2FY11 Q3FY11 yoy change (%) qoq change (%) Allahabad 2,065 3,067 2, (22.5) Axis 7,997 8,490 9, of Baroda 5,203 5,712 5, of India 4,351 5,485 5, Canara 4,863 4,980 5, Corporation 2,148 2,082 2, Dhanlaxmi (52.3) (4.4) HDFC (15.1) (32.2) HDFC Ltd 9,256 10,128 11, ICICI Ltd 16,990 17,220 17, Indian 2,162 2,637 2, (10.2) Positive Positive surprise: surprise: HDFC HDFC ING ING Vysya, Vysya, Yes, Yes, Union Union Negative Negative surprise: surprise: SBI, SBI, Allahabad Allahabad OBC OBC IndusInd 1,113 1,631 1, ING Vysya Ltd 1,213 1,303 1, MMFS OBC 1,869 2,133 2, (6.2) PNB 6,908 6,803 7, Shri Ram Transport 28,599 40,829 35, (13.9) State of India 29,287 38,079 30, (18.7) Union of India 3,350 3,226 3, Yes 1,278 1,310 1, Commission Commission transaction transaction bankg bankg fees fees muted, muted, specially specially for for PSU PSU banks banks Sluggish Sluggish treasury treasury come come impacted impacted by by high high G-Sec G-Sec yields yields Buoyant Buoyant rise rise forex forex come come All s 100, , , (2.0) Private s 38,013 40,165 43, PSU s 62,208 74,204 68, (7.6) 26

27 27 Thank you

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