Motilal Oswal has come with its December`12 quarterly earning estimates for banking sector. The research firm expects RBI to start cutting interest rates from 4QFY13.
The government of India's (GoI) concrete steps towards reforms in 2HCY12 brought rays of hope for Financials. With inflation showing signs of cooling off and growth moderating, we expect the RBI to start cutting interest rates from 4QFY13. Expected improvement in business climate and economic growth, led by continued reforms and RBI actions, will be a big positive (especially for state-owned banks). Despite 15- 20% run-up from the bottom for state-owned banks, we believe valuations remain attractive. With the expected turn in asset quality, further re-rating is possible. Our top picks: state-owned banks - SBIN, CBK, UNBK and OBC; private sector banks - ICICIBC, AXSB and YES; NBFCs - SHTF and LICHF.
Expect healthy earnings growth, driven by private sector banks: Though asset quality has been under stress and business growth remains sluggish, we expect healthy PAT growth of 12% YoY (13% YoY ex-SBIN) for our Financials coverage universe in 3QFY13. This would largely be driven by strong profit growth of 23% YoY for private sector banks and 27% YoY for NBFCs. For state-owned banks, PAT is likely to be flat YoY (down 6% YoY ex-SBIN) and QoQ (led by higher provisions, muted fees and higher tax rate in some cases). Some state-owned banks could surprise positively on the profitability front, as they have been guiding for peaking out of GNPAs while we remain conservative in our estimates.
Sanctions pipeline shrinking; more reforms required to instill confidence: As in FY12, in FY13 too, working capital remains a key driver for corporate loan growth. Our interactions with bankers suggest that while sentiment has improved, at the ground level, people still remain skeptical about the business environment. Further, the existing pipeline of sanctions is shrinking. Thus, to improve growth and investments for FY14, continued reforms and monetary easing is a must. The lag impact of 2-3 years of continued moderation in capex cycle will affect other loan segments (Services and Retail). We expect loan growth for the system to be ~15% for FY13/14. On the deposits front, while SA deposit growth is likely to improve, it is unlikely to keep pace with overall deposit growth. Further, CA deposits in the system continue to decline; this would pressurize CASA ratio.
Continued reforms key to improvement in growth and asset quality outlook: Recent reforms by GoI have led to the improvement in sentiment and growth outlook, in turn leading to improvement in valuations. Further re-rating will be contingent upon expected resolution of the problems faced by the Infrastructure segment and fall in interest rates (boost to G-Sec portfolio). On a reported basis, near-term profitability is likely to be under pressure due to continued stress on asset quality, led by economic moderation and sluggish growth. Benefits of reforms are likely to be reflected in business and asset quality with a lag. Our top picks: state-owned banks - SBIN, CBK, UNBK and OBC; private sector banks - ICICIBC, AXSB and YES; NBFCs - SHTF and LICHF.
|Company||Net Interest Income||Net Profit||Ratings|
|Dec.12||Var. % YoY||Var. % QoQ||Dec.12||Var. % YoY||Var. % QoQ|
|ING Vysya Bank||3,766||16.4||2.1||1,453||21.6||-3.3||Buy|
|Kotak Mahindra Bank||7,877||20.9||3.9||3,171||14.9||13.1||Neutral|
|Bank of Baroda||30,358||14.3||6.1||11,569||-10.3||-11.9||Neutral|
|Bank of India||22,650||9.6||3.1||5,416||-24.4||79.4||Neutral|
|State Bank of India||115,213||0||5||34,924||7||-4.5||Buy|
|LIC Housing Fin||3,811||17||7.8||2,519||11.6||3.7||Buy|
|Power Finance Corp||15,252||39||3.4||10,151||28.3||-3.7||Buy|
|Rural Electric Corp||12,778||27.1||-0.2||9,226||30.8||-4.3||Buy|
|Shriram Transport Fin||9,082||13||4.7||3,577||18.2||6||Buy|
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