Angel Broking has come with its December quarterly earning estimates for banking sector. The research firm continues to prefer large private banks with a strong structural investment case- within which, they prefer Axis Bank and ICICI Bank from a valuation perspective.
Angel Broking earning estimates:Banking Index underperforms the Sensex: Banking stocks continued with their poor run in 3QFY2012 amid continued concerns on the credit quality front. 2QFY2012 results generated some interest in banking stocks, leading to ~15% gain in the Bankex in October; however, domestic macro concerns in the form of slowing economic and credit growth, coupled with deepening sovereign debt crisis in Europe led to heavy selling in all Indian indices, including Bankex. Expectations of cut in Cash Reserve Ratio (CRR) by the Reserve Bank of India (RBI) led to a sharp surge in banking stocks in the first week of December; however, with the RBI resorting to open market operations only to ease liquidity in the 3QFY2012 monetary policy, led to further selling in the Bankex.
By the end of the quarter, the Bankex was down by 15.6% sequentially, underperforming the Sensex by 9.6%. Within our coverage universe, only LIC Housing Finance and HDFC managed to give positive returns of 4.6% and 1.7% qoq, respectively.
Credit growth slows on expected lines amid a weakening economic outlook: Credit growth for the banking sector has been on a declining trend since the beginning of FY2011. Credit growth as of December 16, 2011, dropped to its lowest level since April 2010 (20 months) to below 18% (at 17.1%) because of slowing economy as well as a high base effect (23.9% yoy growth). Incremental credit in FY2012 YTD is lower by 17.9% yoy compared to FY2011 YTD; however, deposit accretion continues to be healthy with incremental YTD deposits growing by 49.3% yoy. Despite increasing deposit growth rates, liquidity pressures increased in 3QFY2012, compared to 2QFY2012 (LAF borrowings averaged ~`86,500cr in 3QFY2012 vs. ~`42,800cr in 2QFY2012) as the widening fiscal deficit led to a substantial increase in government borrowing requirements.
Considering the slowing growth momentum, we expect credit growth to slow down to 16-17% for FY2012-13. While most large banks chose not to raise their deposit rates over the past quarter, few mid-size banks increased them by 15-25bp. On the advances side as well, most banks kept their lending rates constant over the last quarter with a few banks increasing their base rates by 25-50bp. Amongst banks under our coverage, Jammu and Kashmir Bank had the highest average base rate increase (39bp), followed by Yes Bank (38bp) and Federal Bank (36bp).
Overall, we expect large private banks to post 16.2% yoy growth in net interest income, while PSU banks are expected to register 10.8% yoy growth. Large private banks are expected to outperform on the pre-provisioning profit front also with growth of 13.7% yoy compared to 12.3% yoy for PSU banks. While large private banks are expected to report healthy 19.3% yoy growth on the net profit front, PSU banks are likely to post weak 2.6% yoy growth (growth of 0.3% yoy only excluding SBI) due to higher provisioning expenses.
Asset quality to be the key monitorable for banks going forward: Most PSU banks witnessed asset-quality stress and reported higher slippages (11 out of 21 PSU banks reporting more than a 20% qoq increase in their absolute net NPA levels) in 2QFY2012, primarily on account of completion of transition to system-based NPA recognition. Apart from slippages arising due to the switchover to system-based NPA recognition platform, delinquencies from the SME and agri books further aggravated asset-quality pressures and led to higher provisioning expenses for most banks during 2QFY2012. While broadly asset quality deteriorated for PSU banks, private banks on the contrary, which have sharply improved their asset quality over the past two years, remained comfortable on the asset-quality front. Apart from some concerns from the MFI segment, which led to higher restructuring during 2QFY2012 for ICICI Bank (~`740cr), Axis Bank (~`230cr), Yes Bank (~`90cr) and South Indian Bank (~`81cr), overall slippages remained contained for private banks under our coverage.
The incremental increase in base rates by banks, trailing the hikes in repo rates by the RBI over the past year (average increase of 250-300bp in base rates), coupled with the slowdown in economic activity over the same period, evidenced from the GDP growth slowing to below 7% for 2QFY2012 and IIP contracting for the first time in more than two years by 5.1% yoy in October 2011, is expected to have made debt servicing more challenging for borrowers. Moreover, on account of high (albeit cooling) inflation as well as high fiscal and current account deficits, interest rates are expected to remain high until the onset of FY2013. Also, with sectors such as infra, real estate and exports continuing to face macro headwinds, asset-quality concerns are expected to linger. However, that said, incremental provisioning expenses in the current fiscal by banks on account of switchover to system-based NPA recognition and to meet the increase in NPA prudential norms and the mandated provision coverage ratio of 70% have led to a high base. Hence, the percentage increase in actual provisioning expenses in the P&L is not expected to increase significantly, even though genuine slippages are expected to increase going forward.
Apart from higher absolute NPAs, another major concerning factor for banks in the coming quarters would be the recent build-up in their restructured books. With banks preferring the restructuring route currently to minimize provisioning expenses and considering the downside risks to economic growth, slippages could start flowing from these accounts and aggravate the asset-quality situation once the moratorium period ends.
Bond yields ease after hitting three-year high during the quarter: The 10-year G-sec yields continued their uptick and reached a three-year high (9%) in the first fortnight of November, as inflationary expectations, weakening INR and rising fiscal deficit hurt bond market sentiments. With the government mostly set to exceed its annual fiscal deficit target, bond yields continued to harden until the RBI reassured bond market investors by injecting liquidity into the system through its open market operations. Inflation figures for November eased significantly and the RBI's dovish stance concerning interest rates helped aid in further easing bond yiels to 8.3% towards the end of December. The 10-year G-sec yields rose sharply again by ~25bp in the last week of December to end at 8.6% for CY2011. Most banks have already booked MTM losses on bond yields to upwards of 8.5% for 2QFY2012 and, hence, are expected to report only marginal MTM losses (particularly for banks carrying a relatively higher modified duration investment book) in 3QFY2012 results. Also, considering the sharp movement in yields during the quarter, several banks could report trading gain as well.
Outlook and valuation: The broad lending and deposit rates seem to have settled down. Further, with interest rates only poised to start declining from FY2013, we expect margins of banks to remain at relatively similar levels for 2HFY2012, as witnessed in 2QFY2012.
However, leftover upward deposit re-pricing coupled with increased saving deposit rates in cases of some banks could result in marginal NIM contraction. With interest rates having been at the higherend for quite some time now and macro headwinds continuing to hit sectors such as power, textile and real estate
