Visit us at www.sharekhan.com February 23, 2015 Q3FY2015 Banking earnings review Key points In Q3FY2015 the earnings of our banking universe (on an aggregate basis) grew by 6.4% YoY (short of estimates) largely contributed by the private banks (earnings up 18% YoY). However, despite the support of treasury gains (due to a fall in bond yields) the public sector banks (PSBs) disappointed on the earnings front (earnings down 8% YoY). This was due to a slower growth in their net interest income (up 7.7% YoY) and higher provisions. The asset quality of the banks deteriorated further in Q3FY2015 mainly contributed by the PSBs, which saw a rise in fresh NPA additions (3.3% of opening advances vs 3.1% in Q2FY2015). This resulted in higher interest income reversals and provisioning which affected the earnings. On the other hand, the private banks barring ICICI Bank showed a stable asset quality trend. Going ahead, while the asset quality stress may persist in the near term, a likely pick-up in the economy, the government’s efforts to resolve contentious issues, easing of interest rates by the RBI (due to a fall in inflation and an improving macro economy) could ease the challenges over the next 12 months. We prefer Axis bank, HDFC Bank and Yes Bank among the private banks and State Bank of India among the state-owned banks. Among the nonbanking finance companies we prefer LIC Housing Finance, PTC India Financial Services and Capital First. Q3FY2015 results snapshot Banks Rs cr NII Q3FY15 PSBs State Bank of India 13,777 Punjab National Bank 4,233 Bank of Baroda 3,286 Bank of India 2,780 Union Bank 2,121 Corporation Bank 1,029 Andhra Bank 1,259 Allahabad Bank 1,607 IDBI Bank 1,431 PSBs total 31,523 Private ICICI Bank 4,812 HDFC Bank 5,700 Axis Bank 3,590 Federal Bank 587 Yes Bank 909 Private banks total 15,597 Grand total 47,120 NBFCs HDFC 2,017 LIC Housing Finance 549 Capital First 138 Bajaj Finance 824 PTC India Fin. Ser. 90 PPP PAT Q3FY14 YoY % QoQ % Q3FY15 Q3FY14 YoY % QoQ % Q3FY15 Q3FY14 YoY % 12,616 4,221 3,057 2,719 1,964 1,002 868 1,338 1,488 29,273 9.2 0.3 7.5 2.2 8.0 2.7 45.0 20.1 -3.9 7.7 3.8 2.0 -3.4 -8.3 1.8 4.7 14.0 6.8 1.7 1.9 9,294 2,751 2,339 1,865 1,465 727 923 1,075 1,114 21,553 7,618 2,702 2,197 2,144 1,261 744 522 1,010 1,239 19,438 22.0 1.8 6.4 -13.0 16.2 -2.3 77.0 6.4 -10.1 10.9 10.4 -4.4 -2.7 -12.7 9.9 13.9 23.8 -7.1 -6.9 3.1 2,910 775 334 173 302 147 202 164 103 5,110 4,255 4,635 2,984 546 665 13,085 42,358 13.1 23.0 20.3 7.6 36.6 19.2 11.2 3.3 3.4 1.8 -3.1 6.2 2.9 2.2 5,037 4,779 3,315 397 863 14,390 35,943 4,439 3,888 2,615 331 615 11,888 31,326 13.5 22.9 26.8 20.1 40.4 21.1 14.7 7.2 17.7 4.8 -3.0 5.6 9.5 5.5 2,889 2,795 1,900 265 540 8,388 13,498 1,762 458 88 618 55 14.4 19.9 55.8 33.4 63.1 7.4 3.1 9.9 31.7 7.4 2,109 528 76 501 91.6 1,783 18.3 449 17.7 35 115.6 374 33.8 135 -32.0 4.6 6.1 19.5 32.3 -3.4 1,425 344 30 258 55 2,234 30.2 755 2.5 1,048 -68.1 586 -70.4 349 -13.3 127 16.2 46 342.5 325 -49.6 104 -1.1 5,574 -8.3 2,532 2,326 1,604 230 416 7,108 12,681 QoQ % -6.1 34.6 -69.8 -77.9 -18.6 -8.3 39.6 16.0 -13.0 -21.4 14.1 20.2 18.4 15.0 30.0 18.0 6.4 6.6 17.3 17.9 10.1 12.0 13.0 -3.1 1,278 11.6 327 5.4 10 196.0 194 33.1 107 -48.7 5.0 0.9 10.6 31.1 43.7 For Private Circulation only REGISTRATION DETAILS Regd Add: Sharekhan Limited, 10th Floor, Beta Building, Lodha iThink Techno Campus, Off. JVLR, Opp. Kanjurmarg Railway Station, Kanjurmarg (East), Mumbai – 400042, Maharashtra. Tel: 022 - 61150000. Sharekhan Ltd.: SEBI Regn. Nos. BSE - INB/INF011073351 ; BSE- CD ; NSE - INB/INF231073330 ; CD-INE231073330 ; MCX Stock Exchange - INB/INF261073333 ; CD-INE261073330 ; DP - NSDL-IN-DP-NSDL-233-2003 ; CDSL-INDP-CDSL-271-2004; PMS-INP000000662 ; Mutual Fund-ARN 20669 ; Commodity trading through Sharekhan Commodities Pvt. 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Reco Price target CMP FY14 RoA(%) FY15E FY16E Buy Hold Hold Buy Buy Hold Hold Buy Hold 378 203 212 337 268 78 104 135 82 295 163 181 234 177 63 86 109 74 0.6 0.6 0.8 0.5 0.5 0.3 0.3 0.6 0.3 0.7 0.7 0.5 0.4 0.5 0.3 0.4 0.3 0.2 0.8 0.8 0.7 0.5 0.5 0.4 0.5 0.5 0.3 10.0 9.7 13.4 10.1 9.5 5.7 5.1 10.1 5.0 11.4 10.2 10.2 7.6 10.2 7.3 7.9 5.7 2.6 13.5 12.6 12.5 9.9 10.9 9.1 10.5 9.8 4.3 2.0 0.9 1.1 0.6 0.7 0.5 0.6 0.5 0.5 1.8 0.8 1.0 0.5 0.6 0.5 0.5 0.5 0.5 1.6 0.7 0.9 0.5 0.6 0.5 0.5 0.5 0.5 Buy Hold Buy Buy Buy 424 1,260 610 170 930 329 1,063 549 143 811 1.7 1.7 1.7 1.1 1.6 1.6 1.0 1.7 1.7 1.7 1.1 1.6 1.6 1.0 1.8 1.8 1.8 1.2 1.7 1.6 1.1 14.0 21.3 17.4 12.6 25.0 18.1 13.4 14.5 19.8 17.3 13.3 21.0 17.2 12.6 15.7 19.2 17.9 14.5 18.9 17.3 13.8 2.6 5.9 3.4 1.8 4.1 3.6 2.2 2.4 4.4 2.9 1.6 2.9 2.9 1.8 2.2 3.8 2.5 1.5 2.5 2.5 1.6 Hold Buy hold Buy Buy 1,360 558 485 4,305 90 1,309 467 417 4,150 58 2.6 1.6 0.6 3.4 5.0 2.5 1.5 1.0 3.3 3.2 2.5 1.6 1.2 3.3 3.4 20.5 18.8 4.9 19.6 16.1 20.3 18.3 9.1 20.8 14.8 21.4 19.2 12.2 22.3 19.3 7.3 3.1 2.9 5.2 2.4 6.5 2.7 2.7 4.3 2.2 5.7 2.3 2.5 3.6 1.9 FY14 RoE (%) FY15E FY16E PSBs disappoint most on earnings front, private banks’ performance on track: During Q3FY2015, the earnings growth of our banking universe (on an aggregate basis) was below our estimate mainly due to a significant deterioration in the earnings of the top PSBs like Punjab National Bank (PNB), Bank of Baroda (BoB), Bank of India (BoI) and Union Bank of India. State Bank of India (SBI) on a relative basis showed a stable performance on the earnings and asset quality fronts. The weakness in the net interest income and higher provisioning offset the treasury gains recorded during the quarter. On the other hand, the private sector banks under our coverage largely met our earnings expectations (Axis Bank surprised positively). ICICI Bank’s earnings grew at a healthy rate though the asset quality disappointed after showing a stable trend for the past several quarters. Business growth remains sluggish Earnings private banks vs PSBs Credit growth (%) sector update P/BV (x) FY14 FY15E FY16E Given the slowdown in the economy and weak corporate credit demand, the credit growth remained sluggish (4.4% at the industry level). For our coverage universe, the advances grew by 11.8% year on year (YoY), which is largely in line with the systemic growth. The corporate credit grew in single digits in Q3FY2015, leading to a slower credit growth by the PSBs since these are more exposed to the corporate segment. Banks like Axis Bank and Yes Bank showed a strong credit growth of 23% and 32% respectively. The deposits on an aggregate basis grew by 12.6% YoY. The current account and savings account (CASA) ratio deteriorated on an average by 20-25 basis points (BPS) quarter on quarter (QoQ) due to a rise in the term deposit growth. 2 February 23, 2015 sector update Q3FY2015 Banking earnings review Non-interest income growth aided by treasury Net interest margin largely stable, core income growth slows The non-interest income for the banks under our coverage increased by 19% YoY largely supported by treasury profits. The bond yield shrunk by 63BPS in Q3FY2015 which contributed to the treasury profit (especially for banks like IDBI Bank, Union Bank and BoI). On the other hand, the fee income showed a marginal recovery as it grew by 11% YoY (a similar growth was observed in both PSBs and private banks). The growth in the operating expenses was relatively higher for the private banks (up 15.5% YoY) compared with the PSBs (up 10.7% YoY). The net interest margin of banks on an aggregate basis remained stable QoQ and increased by ~10BPS YoY. The cost of funds eased during the quarter which was negated by a fall in the yields due to a reversal of interest income on the non-performing assets (NPAs). Bank of Baroda disappointed the most on the margin front while mid-cap PSBs like Andhra Bank and Allahabad Bank reported a sequential increase of 20-50BPS in the net interest margin. The net interest income growth remained weak for the sector (up 11% YoY) mainly due to a slower credit offtake. Valuations and outlook Asset quality outlook weakens for near term, provisioning remains elevated: The stressed loan formation increased sharply during Q3FY2015 mainly contributed by the PSBs, like PNB, BoB, BOI, Union Bank and IDBI Bank. The gross NPA for the PSBs increased to 5.1% (as a percentage of advances) from 4.8% in Q2FY15 led by a rise in the slippages ratio (fresh NPA addition/ opening advances), which increased to 3.3% from 3.1% in Q2FY2014. Fresh restructuring was relatively lower though the overall stressed loans (NPA+ restructured loans) remain high at 12% of the total advances. The private banks barring ICICI Bank showed a stable asset quality trend. The banks expect stress on the asset quality to continue as stress persist in certain sectors and regulatory forbearance for restructured loans would end by the end of Q4FY2015. The Q3FY2015 results were marred by asset quality pressures though the private banks reported a stable performance. Going ahead, while the asset quality stress may persist in the near term, a likely pick-up in the economy, the government’s efforts to resolve contentious issues, easing of the interest rates by the Reserve Bank of India (RBI; due to a fall in inflation and an improving macroeconomic scenario) could ease the challenges over the next 12 months. Given the strong capital position, lesser asset quality issues and branch expansion, the private banks are better placed to ride the recovery cycle. We prefer Axis Bank, HDFC Bank and Federal Bank among the private banks and SBI among the state-owned banks. Among the nonbanking finance companies we prefer LIC Housing Finance, PTC India Financial Services and Capital First. Stressed loans Evaluation of profitability and valuation ratios on FY16 P/BV Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article. sector update 3 February 23, 2015 sector update Q3FY2015 Banking earnings review Disclaimer This document has been prepared by Sharekhan Ltd. (SHAREKHAN) and is intended for use only by the person or entity to which it is addressed to. This document may contain confidential and/or privileged material and is not for any type of circulation and any review, retransmission, or any other use is strictly prohibited. This document is subject to changes without prior notice. This document does not constitute an offer to sell or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. Though disseminated to all customers who are due to receive the same, not all customers may receive this report at the same time. 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The analyst certifies that all of the views expressed in this document accurately reflect his or her personal views about the subject company or companies and its or their securities and do not necessarily reflect those of SHAREKHAN. Further, no part of the analyst’s compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this document. Compliance Officer: Ms. Namita Amod Godbole; Tel: 022-6115000; e-mail: [email protected] • Contact: [email protected] sector update 4 February 23, 2015
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