Q3 Preview: PSU banks will see treasury gains, says UBS

A: For PSU banks you would see bond gains, as per our estimates if you look at around 65-70 bps decline in bond yields and if you put that number on their available for sale (AFS) book you get almost 20-50 percent kind of the quarterly profits coming only from mortgage. They may or may not book entire treasury gain in the quarter and maybe choose to kind of amortise it over next two quarters. However, still bond gains would be the highlight for this quarter for them.

Ekta: What about private banks, will they also benefit from treasury gains and do you think that they will do better in terms of profitability as oppose to PSU banks? A: I think private banks typically run a very tight treasury book; they don’t keep a lot of duration. Also, they don’t keep a lot of AFS. So, to that extent on a relative basis they will have lower profit. However, their core earnings still would be strong compared to again SOE banks.Ekta: What is your expectation in terms of net interest margins (NIM) especially say for the likes of the IndusInd’s of the world that are impacted because of softer wholesale rates, if you can tell us how much they have softened, wholesale rates over the quarter on a quarter-on-quarter (QoQ) basis and what would the impact be on the likes of a Yes Bank and IndusInd Bank?A: In the quarter there has been softening of almost around 70 bps and if you build that in, in the numbers the only problem is it will take time for their deposit book or liabilities to reprise. So, you don’t see a lot of impact in this quarter but for let us say IndusInd Bank, Yes Bank and other wholesale borrowers we are expecting around 5-7 bps expansion in this quarter. However, the bulk of the impact should be seen in the coming quarters.

Anuj: You have seen big rally in PSU banks, your sense in terms of whether they are still good buys at current price, it is a lot of stocks in that bunch but your overall call on the PSU banks now after the rally?A: In November we upgraded PSU banks, we think there has been a lot of underperformance already behind us in terms of when you compare relative to private banks plus ownership in PSU banks is also very light. If you look at institutionally, even the foreign investors positioning is also very light, not most light and given the expectation of rates going down and potential reform we don’t know whether reform will happen on which day but definitely it is something which is under discussion. What we expect in terms of structural reforms for PSU banks especially in next two to three years, we think these names are very attractive at these levels.

Ekta: What would your expectation be on the asset quality within the PSU banks this quarter if you compare it to the previous quarter?A: I think it could be tad better. We are not expecting anymore worsening there and when I say that I mean their NPL slippage numbers shouldn’t be going up at least for the larger ones which we cover. However, there can be some very good cases in PSU banks and there can be some weak asset quality coming out in case of smaller banks. However, overall it should be slightly better. Ekta: What is your average gross NPL estimate for this earnings season as oppose to the previous? A: We cover three banks, State Bank of India (SBI), Bank of Baroda (BoB) and Punjab National Bank (PNB). If I look at the NPL slippage number PNB should be slightly lower because of the huge NPL built up last quarter. SBI should be either the same or slightly lower and BoB should be typically flattish because they were not reporting huge NPL slippages. So, as I said it should look slightly better only than the previous quarter. Anuj: What is your call on NBFCs and housing finance companies in general because we have seen quite a bit of rally in some of these names? A: That is a very attractive sector and we have been pushing it even pre-election because that is a sector which wasn’t dependent too much on government. However, now that even government is pushing housing, etc they are getting further rerated. So, I think two things here, one they are not too dependent on any reforms; that is good thing and that is why their multiples are slightly higher than some of the private banks also. Second the whole rate cycle is helping them in this particular environment because banks are unable to cut lending rates as fast as the wholesale book is reprising for all these guys. So, their spreads have already kind of expanded. If you see incremental spread should be more like 2 percentage compared to 1.2 percent six months ago. So, all this benefit should come to housing finance companies. Ekta: You expect housing finance companies to lead as oppose to other NBFCs in this earnings season?A: Yes because that is where the core growth could be. Disclosures: I don’t own any of the financial stocks I cover.