India Banking Trends Q2FY19 results review: Early signs of the credit cost cycle normalising

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1 INSTITUTIONAL EQUITY RESEARCH India Banking Trends Q2FY19 results review: Early signs of the credit cost cycle normalising INDIA FINANCIAL FORTNIGHTLY Private corporate banks outperformed: PBT for banks under our coverage was in line with our estimates, as higher NIIs (due to strong credit growth) were offset by higher provision (Retail & PSU Banks). Corporate banks saw 14% better PBT vs. our estimates, mainly due to strong performance by private banks (+44% vs. our estimates) on strong NII and lower provisions. Retail banks PBT was slightly lower than our estimates due to higher provisions ( s towards IL&FS). Public banks disappointed because of higher provisions. Key themes during earnings calls: NIMS Most banks said that they were seeing some pricing power coming back and expected this, along higher MCLR, to provide some tailwinds for NIMs. We believe banks with higher CASA ratios are likely to benefit most in the current scenario. IL&FS exposure: For almost all banks, IL&FS exposure was standard as of 3 Sep 218. However, some (,,, & ) made provisions for this exposure. According to banks, exposure to operating entities is easier to manage, given their good asset base while exposure to holding companies is likely to see some stress. NBFCs/Liquidity: Most banks under our coverage have reviewed their NBFC portfolios and are satisfied with it. Banks are open to buying NBFCs portfolios, but mostly related to retail and SME; they view it as an opportunity to increase their loan books. Asset quality: Most banks saw sequential declines in slippages in Q2FY19. Managements believe that the high NPA cycle has peaked and credit cost is likely to normalise ahead. Key catalyst for 3QFY19: We believe these would be: (1) Details about IL&FS resolution, (2) NBFC liquidity scenario; it is getting better vs. September. Commercial papers outstanding gained 6% in Oct 218 to Rs 5.8tn after declining 1 in Sep 18 to Rs 5.5tn, (3) Updates on the government s capital infusion into PSUs, and (4) recoveries in NCLT cases. Top picks in banking: With pricing power coming back to banks, we prefer banks with high CASA and strong liquidity positions. Bank, Bank,, and Mahindra Bank provide a strong liability franchise with sturdy LCRs. 13 November 218 Sujal Kumar ( ) sukumar@phillipcapital.in Manish Agarwalla ( ) magarwalla@phillipcapital.in Pradeep Agrawal ( ) pagrawal@phillipcapital.in Profit for the banks we cover (excluding ) was in line with what we expected. Including, it was 39% below % 13% 61% 41% PBT 2Q19E NII Non NII Opex Provision PBT 2Q19A PAT 2Q19A (Inc ) Source: PhillipCapital India Research Page 1 PHILLIPCAPITAL INDIA RESEARCH

2 Private corporate banks outperformed vs. estimates. Retail was in line. Public banks disappointed Corporate banks PBT (excluding ) was 14% better than our estimate on better NIIs (strong credit growth and stable NIMs) and lower opex, offset by higher provisions (PSU banks). Private corporate banks PBT was 44% better than our estimates. Retail banks PBT was 3% below estimates on higher provisions ( on IL&FS exposure) Corporate Retail % 39% 114% 1.9% 1.6% 97% 1.4% 3.6% 5 5 PBT 2Q19E NII Non NII Opex Provision PBT 2Q19A 178% 64% PBT 2Q19A (inc ) PBT 2Q19E NII Non NII Opex Provision PBT 219A PBT for private banks under our coverage was 6% better than our estimates on higher NII and fee income (retail banks: 3% yoy; corporate banks: +44%). Public banks (ex ) under our coverage continued to disappoint with PBT 5 below our estimate, mainly because of higher provisions and lower non NII income Private Public (ex ) 1 6% 3% 6% % % 137% 48% PBT 2Q19E NII Non NII Opex Provision PBT 2Q19A PBT 2Q19E NII Non NII Opex Provision PBT 2Q19A Source: PhillipCapital India Research Page 2 PHILLIPCAPITAL INDIA RESEARCH

3 Year on Year: Retail banks continue to show stable growth Retail banks under our coverage reported 18% yoy growth in PBT, while corporate banks saw 38% decline (private: 16%; PSU: 77%). Decline in corporate banks profit was mainly due to lower non NII income and higher opex. Provisions declined yoy, indicating early signs of normalised credit costs ahead Corporate Retail % 88% % 13% 8% 118% 5 51% 97% 3 PBT 2Q18 NII Non NII Opex Provision PBT 2Q19 PBT 2Q19 (inc ) PBT 2Q18 NII Non NII Opex Provision PBT 2Q19 Private banks saw 7% PBT growth yoy mainly on higher NII (strong credit growth and stable NIMs). Within private banks, retail banks saw 18% PBT growth (higher income offset by higher provisions). Corporate banks reported 16% decline in PBT because of lower trading income and higher opex Private % 34% 17% 7% 4% PBT 2Q18 NII Non NII Opex Provision PBT 2Q19 Public (ex ) 3 149% 2 237% 23% 366% 2 98% 3 PBT 2Q18 NII Non NII Opex Provision PBT 2Q19 Source: PhillipCapital India Research Page 3 PHILLIPCAPITAL INDIA RESEARCH

4 Sector Trend Credit and deposit growth for both public and private banks remained stable; private banks continued to capture market share Advances Growth Deposit Growth 2 Public Private 2 Private Public Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Net interest margins of private banks saw a slight uptick, as benefits of higher MCLR started coming in, resulting in higher loan yields. However, NIMs for public banks declined, mainly due to the absence of any major interest reversal (which had boosted 1QFY19 margins). Cost to income ratio remained stable NIM (NII / average interest earning asset) Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY % % 2.7% 2.8% 1% Private Public Overall Cost to income ratio 7 Private Public Overall Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Source: PhillipCapital India Research Page 4 PHILLIPCAPITAL INDIA RESEARCH

5 Credit cost, GNPA ratio, and slippages continue to decline, showing early signs of the credit cost cycle normalising Credit cost (provisions/average loan) GNPA ratio Slippages as a % of average loan Private Public Overall 1 8% 6% 4% Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 3% 14% % 9. 8% 7.1% 1% 6% 4.6% 4% 2.9% Private Public Overall Private Public Overall Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Source: PhillipCapital India Research,, and have highest GNPA and NNPA ratios while,, and have lower ones Bank wise GNPA ratio (2QFY19) 16% 1 8% 4% Bank wise NNPA ratios (2QFY19) 1 8% 6% 4% a Source: Company Reports, PhillipCapital India Research Page 5 PHILLIPCAPITAL INDIA RESEARCH

6 IL&FS exposure Private banks Total Rs 8.25bn exposure (Fund Based: Rs 2.4bn); provided for fundbased exposure. Rs 5.39bn is part of the BB and below vulnerable book. Primarily to EPC company of group. Account downgraded to BB and below. Exposure to holding entity: Rs 2bn. Operating entity: Rs bn. Exposure: Rs 26.6bn. No provision as of now; in the worst case, credit cost can increase by bps. Public banks BoB Road 18%; renewable 2; thermal 1; NBFC 1; parent 18%. Provision (Rs 2.4bn) was made towards NBFC and parent co. Rs 25bn (%) spread over 13 accounts; 2 were NPAs worth Rs 7bn. Another 3 worth Rs 8bn may slip in the subsequent quarter. Total exposure Rs 18bn (NPA: Rs 2.9bn; standard: Rs 15bn); provided Rs 1.8bn. Total exposure Rs 4bn (holdco Rs.9bn; ITNL Rs 1.5bn; balance to SPVs). NBFC exposure Key Catalyst for 3QFY19 IL&FS: ILFS exposure was standard at most banks as of 3 Sep 218. If no resolution is reached, this exposure can slip into NPAs. Liquidity situation: The portfolio buyout by individual banks from NBFCs can add to their respective loan book growth. The NBFC liquidity scenario is better today, compared to the September scenario. The builder loans portfolio is vulnerable to the NBFC liquidity situation. Capital infusion: Second round of capital Infusion is expected to finalise in 3QFY19. Banks are likely to get growth capital in this round for expanding their lending, particularly MSMEs. The government had announced the Rs 2.11tn of capital infusion in October 217. According to the plan, PSBs were to get Rs 1.35tn through re capitalisation bonds and the rest Rs 58 bn by raising capital from the market. So far, the government has already infused about Rs 82bn through recap bonds and the rest would be done during this fiscal. Recoveries: NCLT cases / power sector resolution Asset Quality Review/Divergence Report: RBI is reviewing 16 accounts and may come out with guidelines for banks to provide ageing provisions for these accounts. Bank: Any new development related to Bank s new management is expected by mid December; could be positive for the stock. Regulation NBFCs: RBI may come out with guidelines for NBFCs, which could impact their funding strategy. : is currently in consultation with RBI for promoter stake dilution. Any clarity on this should be positive M&A BoB, Dena and a: SWAP ratio details for merger of Bank of Baroda, Dena, and a Banks is expected by the end of November. Bank: Promoter needs to dilute its stake to from present 8; M&A is one possible way for bringing down this stake. Page 6 PHILLIPCAPITAL INDIA RESEARCH

7 Bank wise performance vs. estimates NII Non NII Total Operating Income 1 8% 6% 4% Beat Miss Beat Miss 1 1 Beat Miss 1 4% 1 1 Opex Pre Provision Profit Provision 6% Miss Beat 4% 4% 6% 8% 5 Beat Miss Miss Beat Source: Company reports, PhillipCapital India Research Page 7 PHILLIPCAPITAL INDIA RESEARCH

8 PBT PAT NIM 5 Beat Miss 4 4 Beat Miss 3 3 Beat GNPA NNPA Slippages 2 Miss Beat Miss Beat Miss Beat Source: Company reports, PhillipCapital India Research Page 8 PHILLIPCAPITAL INDIA RESEARCH Miss

9 Advance Deposit 8% 8% Beat Miss 6% 6% Beat Miss 4% 4% 4% Source: Company Reports, PhillipCapital India Research Page 9 PHILLIPCAPITAL INDIA RESEARCH

10 Bank wise sequential performance (qoq) NII Non NII Total Operating Income a a a Opex Pre Provision Profit Provision a a a Source: Company reports, PhillipCapital India Research Page PHILLIPCAPITAL INDIA RESEARCH

11 PBT PAT NIM a a a GNPA NNPA Slippages % a a a Source: Company reports, PhillipCapital India Research Page 11 PHILLIPCAPITAL INDIA RESEARCH

12 Advance Deposit 14% % 6% 4% 8% 6% 4% 4% Source: Company Reports, PhillipCapital India Research Page 12 PHILLIPCAPITAL INDIA RESEARCH a a

13 Bank wise year on year performance (yoy) NII Non NII Total Operating Income Opex Pre Provision Profit Provision Source: Company reports, PhillipCapital India Research Page 13 PHILLIPCAPITAL INDIA RESEARCH

14 PBT PAT NIM GNPA NNPA Slippages % Source: Company reports, PhillipCapital India Research Page 14 PHILLIPCAPITAL INDIA RESEARCH

15 Advance Deposit Source: Company Reports, PhillipCapital India Research Page 15 PHILLIPCAPITAL INDIA RESEARCH

16 NBFCs Page 16 PHILLIPCAPITAL INDIA RESEARCH

17 NBFC performance vs. estimates NII Operating profit PAT STFC SCUF MGMA MMFS CIFC STFC SCUF MMFS MGMA CIFC 2 MMFS SCUF STFC CIFC MGMA NBFC s year on year performance (yoy growth) NII growth Operating profit PAT growth MMFS STFC CIFC SCUF MGMA MMFS CIFC STFC SCUF MGMA MMFS CIFC STFC SCUF MGMA Source: Company reports, PhillipCapital India Research Page 17 PHILLIPCAPITAL INDIA RESEARCH

18 NBFCs: Key indicators GNPA AUM growth Two wheeler sales Sept 18' GNPA% June 17' GNPA% STFC CIFC MMFS SCUF MGMA Total STFC CIFC MMFS SCUF MGMA Two Wheeler Scooters Apr 17 May 17 Jun 17 Jul 17 Aug 17 Sep 17 Oct 17 Nov 17 Dec 17 Jan 18 Feb 18 Mar 18 Apr 18 May 18 Jun 18 Jul 18 Aug 18 Sep 18 Tractor sales Cars and utility vehicle sales MHCV and LCV sales Cars Utility Vehicles MHCV LCV Apr 17 May 17 Jun 17 Jul 17 Aug 17 Sep 17 Oct 17 Nov 17 Dec 17 Jan 18 Feb 18 Mar 18 Apr 18 May 18 Jun 18 Jul 18 Aug 18 Sep 18 Apr 17 May 17 Jun 17 Jul 17 Aug 17 Sep 17 Oct 17 Nov 17 Dec 17 Jan 18 Feb 18 Mar 18 Apr 18 May 18 Jun 18 Jul 18 Aug 18 Sep 18 Apr 17 May 17 Jun 17 Jul 17 Aug 17 Sep 17 Oct 17 Nov 17 Dec 17 Jan 18 Feb 18 Mar 18 Apr 18 May 18 Jun 18 Jul 18 Aug 18 Sep 18 Source: Company reports, PhillipCapital India Research Page 18 PHILLIPCAPITAL INDIA RESEARCH

19 Banking & Financial Services Trends Page 19 PHILLIPCAPITAL INDIA RESEARCH

20 NBFC and HFCs funding and liquidity Commercial paper as a % of total funding 3 28% Asset liability gap (one year) as a % of total assets % 13% % 1 7% 7% 7% 6% % 11% 4% 3% 3% 1% 8% 3% MGFL MUTH IHFL MMFS SCUF REPCO CIFC SHTF DEWH MGMA LICHF 3 MUTH MGFL SCUF MMFS IHFL MGMA SHTF CIFC DEWH LICHF REPCO 24% Funding Current borrowing as a % of total funding 87% 78% 74% 5 43% 37% 37% 36% 36% 24% 24% MGFL MUTH MGMA SCUF MMFS REPCO IHFL SHTF CIFC DEWH LICHF HFCs funding profile Bank + NHB NCDs CPs Others 1 7% 6% 14.3% 3% 1 16% 6. 31% 33.8% 13% 4 79% 74% 43% 45.4% 36% 1 11% REPCO DEWH IHFL LICHF Source: Company, PhillipCapital India Research Page 2 PHILLIPCAPITAL INDIA RESEARCH

21 Bank liquidity Liquidity coverage ratio (LCR) 2 Asset liability gap (one year) as a % of total assets *March 218 Bank liquidity and exposure Excess liquidity/advances (bank group wise) 7% 6% 4% 7% Banks exposure to NBFC % 1% PSU Bank (Ex PCA) PCA Banks Private Banks Source: Company, PhillipCapital India Research Page 21 PHILLIPCAPITAL INDIA RESEARCH

22 Mutual fund exposure to NBFCs Portfolio breakup of debt mutual funds CPs and CDs outstanding (Rs bn) CP CDs Corporate Debt PSU Bonds Gov Securities & T Bills Others Sep 17 Dec 17 Mar 18 Jun 18 Aug 18 Sep 18 7, 6, 5, 4, 3, 2, 1, Jan 16 Apr 16 Jul 16 CP Outstanding Oct 16 Jan 17 Apr 17 Jul 17 CD Outstanding Oct 17 Jan 18 Apr 18 Jul 18 Oct 18 Maturity and rating profile Maturity profile of commercial papers Rating profile of debt mutual fund investments AAA (Bonds), 23% AA (Bonds), 13% Less than 9 days, 89% 9 days to 182 days, 1 A1 (CDs), 8% A (Bonds), 4% Others, 11% 182 days to 1 year, 1% A1 (CPs), 33% G Secs & Tbills, 8% Source: SEBI, RBI, PhillipCapital India Research Page 22 PHILLIPCAPITAL INDIA RESEARCH

23 Credit and deposit growth Credit and deposit growth (yoy) Credit growth by sector (yoy) 3 Deposit (%) Credit (%) CD ratio (rhs) Jun 18 Sep 12 Dec 12 Mar 13 Jun 13 Sep 13 Dec 13 Mar 14 Jun 14 Sep 14 Dec 14 Mar 15 Jun 15 Sep 15 Dec 15 Mar 16 Jun 16 Sep 16 Dec 16 Mar 17 Jun 17 Sep 17 Dec 17 Mar 18 Jun 18 Sep 18 Sep 12 Dec 12 Mar 13 Jun 13 Sep 13 Dec 13 Mar 14 Jun 14 Sep 14 Dec 14 Mar 15 Jun 15 Sep 15 Dec 15 Mar 16 Jun 16 Sep 16 Dec 16 Mar 17 Jun 17 Sep 17 Dec 17 Mar 18 Sep 18 Agriculture Industry Retail Services Rates year GSec rate one year MCLR % % 8.9% 8.7% % 8.1% 7.9% 7.7% Oct 18 Apr 16 Jun 16 Aug 16 Oct 16 Dec 16 Feb 17 Apr 17 Jun 17 Aug 17 Oct 17 Dec 17 Feb 18 Apr 18 Jun 18 Aug 18 Source: RBI,, PhillipCapital India Research Page 23 PHILLIPCAPITAL INDIA RESEARCH

24 Valuation Metrics P/B vs. RoE P/Adj BV CBK Relative price performance Weekly performance YES MMFC MUTH KMB MGMA IIB CIFC MGFL SGTF SCUF CBK INBK 13% INBK % 4% 3% RoE 1% 1% 1% 3% 4% 7% 1%1% IIB P/B vs. RoA P/Adj BV CBK Monthly performance CIFC SGTF MMFC MGFL MUTH CBK KMB MGMA SCUF INBK IIB YES INBK IIB % 9% 1 3% RoA 3%3% 6% %1 1 16% Source: PhillipCapital India Research Page 24 PHILLIPCAPITAL INDIA RESEARCH

25 Valuation table Reco M.Cap CMP TP Upside P/BV EPS BV (Rs. bn) (Rs.) (%) FY18 FY19 FY2 FY18 FY19 FY2 FY18 FY19 FY2 Private Banks Bank BUY 1, Bank BUY Bank BUY 2, % Bank BUY 94 1,52 2,17 44% Bank BUY 5,28 1,943 2, Bank BUY 2,211 1,159 1,5 29% Bank BUY % PSU Banks Bank of Baroda BUY % Bank Sell % Bank BUY % Punjab National Bank Neutral % State Bank of India BUY 2, % NBFCs Cholamandalam BUY 27 1,325 1,435 8% Mahindra Finance Neutral % Shriram City Finance BUY 2 1,55 1,95 23% Shriram Transport Finance BUY 28 1,234 1,2 3% Manappuram Finance BUY % Magmafincorp BUY % Muthooth Finance BUY % HFCs Ltd. BUY 2,915 1,811 1,982 9% Repco Home Finance Neutral LIC Housing Finance BUY % Dewan Housing Finance Neutral Indiabulls Housing BUY , Source: PhillipCapital India Research Estimates Page 25 PHILLIPCAPITAL INDIA RESEARCH

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