Motilal Oswal has come with its March`13 quarterly earning estimates for financial sector. The research firm expects reforms and monetary easing to continue, thereby growth is expected to revive gradually.
Motilal Oswal has come with its March`13 quarterly earning estimates for banking sector. The research firm expects reforms and monetary easing to continue, thereby growth is expected to revive gradually.
Government's concrete steps on reforms over the past year have improved business sentiments. Further, deteriorating macro-economic indicators and cooling headline inflation has paved some way for the Reserve Bank of India (RBI) to reduce policy rates (our house view is that RBI will cut rates further by 50bp in CY13). Focus to improve the economic growth mix (reduce twin deficits and improve capex cycle) remains a key. We expect reforms and monetary easing to continue, thereby growth is expected to revive gradually.
While we estimate moderate business growth of 14-15 percent, expected stabilization in asset quality and margins, higher trading gains will aid our banking universe to report 15 percent+ earnings CAGR over FY14E/15E. Incremental delinquency is expected to decline as growth bottoms out, interest rate eases and investment activity picks up. Return ratios are expected to be healthy, with RoA of ~0.9 percent and RoE of 15 percent+ for state-owned banks, while for private banks it is expected to be 1.7 percent and 18 percent+ respectively. We prefer banks with adequate capitalization, strong liability franchise and those who have recognized stress upfront. Top picks: State-owned banks are State Bank of India (SBIN), Punjab National Bank (PNB), Canara Bank (CBK) and Oriental Bank (OBC), and among private banks are ICICI Bank (ICICIBC), Axis Bank (AXSB) and Yes Bank (YES).
State-owned banks - stabilizing core operations; Private banks - strong earnings of 20 percent+ to continue- In 4QFY13E, state-owned banks are expected to report a better performance over last three quarters, led by stable NIMs (post decline of 30bp in the last three quarters) and asset quality performance (net slippages are expected to remain stable/decline for most banks). Higher trading gains could provide a cushion; however, an increase in employee expense (wage negotiation related provisions and standardization of actuarial assumption for pension) could spring a negative surprise. Overall, stateowned banks are expected to report an earnings decline of 16 percent YoY; but post three quarters of sequential decline, earnings are expected to improve by 4 percent. Private banks are expected to continue their trend on a strong path (stable NIMs, healthy fees and asset quality performance), and hence earnings growth is expected to be 4 percent+ QoQ and 22 percent+ YoY.
Benefits of deposit rates decline to be compensated by fall in yield on assets - NIMs to remain stable- Average QTD 3M, 6M and 12M bulk deposits rates increased by 30-50bp. However, on a average YTD basis, it is lower by 50-60bp, the benefits of which will percolate in the form of lower cost of funds. However, this would be compensated by (a) fall in yield on loans as business growth continued to be moderate, (b) build-up of low yielding PSL and (c) higher flow of money has been channelized into low yielding investments. We expect margins to be stable QoQ for both state-owned and private banks. Banks with a higher proportion of bulk deposits are expected to report an improvement in margins. Banks with a positive bias on margins are CBK, YES and AXSB.
|Company||Net Interest Income||Net Profit||Ratings|
|Mar.13||Var. % YoY||Var. % QoQ||Mar.13||Var. % YoY||Var. % QoQ|
|Bank of India||24,260||-3||5.1||7,484||-21.5||-6.9||Neutral|
|Rural Electric Corp||14,909||46.1||4.2||10,927||42.4||4.8||Buy|
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