Download Banking Sector

Banking Sector
Institutional Equity Research
Results Preview | July 10,2017
Challenging Quarter in the Offing
The performance of Banking, Financial Service & Industry (BFSI) is likely to remain under pressure owing
to slower momentum in NII growth and higher credit cost. We expect the banks having significant
exposure to corporate term loan to report sequential rise in slippages and higher provisioning
expenses. The Reserve Bank of India (RBI) has identified 12 large stressed corporate accounts and
asked the banks to refer them to newly enacted Insolvency & Bankruptcy Code (IBC). Further, the
RBI has also asked the banks to provide >50% on exposure to these accounts, which will negatively
impact their profitability. Besides, the RBI has given a timeframe of 6 months (till December 31, 2017) to
resolve several other large stressed accounts. In case the banks fail to resolve these accounts by the
given timeframe, they might have to refer them to IBC. Hence, we expect earnings of the corporate
focused banks to remain subdued in 1QFY18. Further, ageing of the existing NPAs would keep credit
cost of the banks having higher stressed loan portfolio at elevated level. However, the banks with
higher retail/consumer portfolio will continue to show stable trend in their assets quality. Hence, the
banks with more focus towards retail lending will continue to deliver a better performance both on
earnings and assets quality front.
Banking system credit growth still remains at multi-year low of 6% in the fortnight ending June 23,
2017. YTD growth in loan book stood at negative 0.3%, which clearly indicates muted growth in loan
book in 1QFY18, especially of the corporate focused PSU banks. Further, deposit growth also remains
higher due to massive deposit inflow during the demonetization drive. Owing to liquidity overhang in
the sector, lending rate also fell sharply, which resulted in moderation in Net Interest Margins (NIMs).
This along with pressure on NIMs will curb NII growth for these banks in 1QFY18 and in full FY18 as well.
However, the sector has got positively impacted by the shift in RBI Monetary Policy stance from neutral
to accommodative due to sharp fall in inflation. G-Sec yield declined sharply post May 2, 2017, which
resulted in mark-to-market (MTM) gain on non-HTM investment portfolio of the banks. As the banks
have deployed major chunk of excess liquidity from the demonetization drive in these government
bonds, they have option to book profit from this portfolio. Further, the treasury gain is expected to
remain sequentially higher, which would support their profitability.
We expect our banking sector coverage universe to report a subdued growth in NII (16.6% YoY and
0.2% QoQ) led by private banks with 16.6% YoY and 1.7% QoQ growth vs. 16.3% YoY and 1% QoQ
decline by their PSU counterparts. We expect core fee income to remain subdued due to lower credit
off-take and relatively lower third party distribution income. As a result, other income of our banking
sector coverage universe is expected to decline by 6.1% QoQ. Thus on pre-provisioning profit front,
we expect 17.1% YoY growth and 7.9% QoQ decline, led by PSU banks with 21.1% YoY growth and 14%
QoQ decline vs. 12.9% YoY and 0.2% QoQ growth by the private banks. We expect our banking sector
coverage universe to report 5.2% YoY growth and 0.3% QoQ decline in PAT, led by PSU banks with
7.3% YoY and 9.5% QoQ growth vs. 4.3% YoY growth and 4.1% decline QoQ by the private banks, as
we expect the credit cost of the PSU banks would moderate from high base of the year-ago quarter.
Outlook & Valuation
Lower operating profit, subdued core fee income and higher credit cost on ageing of NPAs will
negatively impact sequential performance of the banks in 1QFY18. As the recent steps by the RBI and
the Government of India clearly indicate that the banks will have to accelerate the resolution of their
assets quality, we expect further surge in provisioning expenses in FY18E. We expect overall return will
continue to remain depressed over FY118E for the sector in general and the PSU banks in particular.
Though the incremental deterioration in asset quality has been aptly addressed in last few quarters,
speedy resolution will continue to impact banks’ profitability. We expect this trend to continue along
with further improvement in core operating performance. As we expect the demand for retail loan
to pick-up before any rise in demand for infrastructure/corporate loans, we prefer the banks having
higher exposure to consumer and business banking portfolio. We expect asset quality stress would
decline along with relatively moderation in credit cost from FY19E.
Our Top Picks: IndusInd Bank, DCB Bank, HDFC Bank and Federal Bank among private banks, while
among the PSBs, State Bank of India (SBI), Bank of Baroda (BoB) and Indian Bank are expected to
outperform their PSB peers.
Research Analyst: Asutosh Kumar Mishra
Contact: (022) 33201323
Email: [email protected]
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Banking Sector
Institutional Equity Research
Results Preview | July 10,2017
Exhibit 1: 1QFY18 Results Preview
Company
1Q FY18
1Q FY17
YoY%
4Q FY17
QoQ%
Comments
Axis Bank
NII
49,326
45,169
9.2
47,286
4.3
Other Income
26,094
27,383
(4.7)
30,132
(13.4)
Operating Profit
42,553
44,694
(4.8)
43,747
(2.7)
11,067
15,555
(28.9)
12,251
(9.7)
4.2
6.5
(36.2)
5.1
(18.8)
36,134
33,711
7.2
35,819
0.9
PAT
EPS (Rs)
ff
ff
ff
Fresh slippages would increase sequentially, which would lead to higher credit cost.
NIM is expected to witness moderate decline sequentially.
Bottom line growth is expected to remain subdued.
ff
Fresh slippages would moderate sequentially along with improvement in upgrades and
recovery.
Credit cost is expected to remain elevated due to ageing of NPAs and ongoing balance
sheet cleaning-up.
Bank of Baroda
NII
Other Income
15,852
14,444
9.8
19,773
(19.8)
Operating Profit
27,554
26,695
3.2
30,202
(8.8)
4,039
4,236
(4.6)
1,547
161.1
2.2
1.8
21.6
0.7
233.2
NII
25,311
23,074
9.7
27,082
Other Income
16,545
15,847
4.4
23,963
Operating Profit
20,735
18,189
14.0
29,729
3,945
2,290
72.3
2,142
84.2
6.0
4.2
42.3
3.9
53.2
2,251
1,770
27.2
2,203
2.2
650
601
8.0
636
2.2
PAT
EPS (Rs)
ff
Canara Bank
PAT
EPS (Rs)
(6.5) ff
(31.0) ff
ff
(30.3)
NIM is expected to remain at current level led by moderation in cost of fund.
Higher treasury income will positively impact the operating income.
Credit cost would continue to remain elevated.
DCB Bank
NII
Other Income
1,202
927
29.6
1,153
4.2
PAT
Operating Profit
538
470
14.3
529
1.7
EPS (Rs)
2.4
1.7
43.2
1.9
27.7
ff Loan growth is expected to remain higher than the industry average.
ff Asset quality is expected to remain stable sequentially.
ff However, higher expenses will continue to impact bottom line growth.
Continued...
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Banking Sector
Institutional Equity Research
Results Preview | July 10,2017
1QFY18 Results Preview
Company
1Q FY18
1Q FY17
YoY%
4Q FY17
QoQ%
NII
8,653
6,927
24.9
8,424
2.7
Other Income
2,725
2,370
15.0
3,199
(14.8)
Operating Profit
5,322
4,259
25.0
5,492
(3.1)
PAT
2,561
1,673
53.0
2,566
(0.2)
1.4
1.0
40.2
1.5
(8.7)
90,432
77,814
16.2
90,551
(0.1)
Comments
Federal Bank
EPS (Rs)
ff
ff
ff
Asset quality is expected to remain stable sequentially.
NIM is expected to remain stable on QoQ basis.
Loan book growth is expected to remain above industry average.
ff
Loan book growth is expected to remain healthy led by higher growth in working capital
finance portfolio and CV.
NIM is expected to remain stable sequentially.
PAT is expected to remain strong led by healthy operating performance and lower credit
cost.
HDFC Bank
NII
Other Income
31,657
28,066
12.8
34,463
(8.1)
Operating Profit
69,627
58,192
19.7
72,794
(4.4)
PAT
39,661
32,389
22.5
39,901
(0.6)
15.5
12.8
20.9
15.6
(0.8)
NII
59,782
51,585
15.9
59,622
0.3
Other Income
35,237
34,293
2.8
30,172
16.8
Operating Profit
57,194
52,147
9.7
51,120
11.9
PAT
17,060
22,324
(23.6)
20,247
(15.7)
2.8
3.8
(27.9)
3.5
(20.5)
14,296
12,363
15.6
13,849
EPS (Rs)
ff
ff
ICICI Bank
EPS (Rs)
ff
ff
Though fresh slippages would moderate sequentially, credit cost is expected to remain
elevated.
Loan book growth is expected to be marginally below the industry average.
Indian Bank
NII
ff Loan book growth is expected to be above the industry average.
(0.3) ff NIM is expected to remain at current level owing to moderation in cost of fund.
ff Farm loan wavier may impact asset quality.
3.2
Other Income
5,835
4,417
32.1
5,854
Operating Profit
11,273
9,032
24.8
10,701
PAT
3,263
3,074
6.1
3,197
2.1
7.6
6.4
18.5
6.7
13.9
EPS (Rs)
5.3
Continued...
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Banking Sector
Institutional Equity Research
Results Preview | July 10,2017
1QFY18 Results Preview
Company
1Q FY18
1Q FY17
YoY%
4Q FY17
QoQ%
NII
17,670
13,564
30.3
16,675
Other Income
11,532
9,730
18.5
12,113
Operating Profit
15,510
12,338
25.7
15,722
PAT
8,228
6,614
24.4
7,516
9.5
14.9
11.1
34.2
12.6
18.6
22,067
19,191
15.0
21,614
Comments
IndusInd Bank
EPS (Rs)
6.0 ff
(4.8) ff
ff
(1.3)
Loan book growth is expected to be above than the industry average.
Slippages and credit cost would increase marginally.
Decline in cost of fund would lead to improved NIM.
Kotak Mahindra Bank
9,302
7,332
26.9
10,027
ff
(7.2) ff
16,460
13,150
25.2
17,020
(3.3)
9,670
7,420
30.3
9,765
(1.0)
5.6
4.0
38.9
5.3
5.7
NII
39,162
36,990
5.9
36,835
Other Income
23,243
23,551
(1.3)
16,949
Operating Profit
35,276
32,746
7.7
48,239
1,474
3,064
(51.9)
2,619
(43.7)
2.5
1.6
58.7
1.2
101.3
178,153
143,123
24.5
180,707
NII
Other Income
Operating Profit
PAT
EPS (Rs)
2.1
Operating expenses would decline sequentially as there was little one-off expenditure.
We expect profitability to improve sequentially led by the improved core operating
performance.
Punjab National bank
PAT
EPS (Rs)
6.3 ff
37.1 ff
ff
(26.9)
Sharp decline in bond yield would positively impact the performance in 1QFY18.
We except fresh slippages to moderate further along with higher upgrades and recovery.
Credit cost is expected to remain elevated due to ageing of NPAs.
State Bank of India
NII
Other Income
Operating Profit
PAT
EPS (Rs)
ff We except fresh slippages to moderate further along with higher upgrades and recovery.
(5.6) ff Sharp decline in bond yield would positively impact the performance in 1QFY18.
ff Balance sheet growth is expected to remain weak.
(1.4)
97,479
73,351
32.9
103,275
146,755
110,539
32.8
160,265
27,341
25,210
8.5
28,148
(2.9)
5.6
3.2
71.1
3.6
56.6
(8.4)
Continued...
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Banking Sector
Institutional Equity Research
Results Preview | July 10,2017
1QFY18 Results Preview
Company
1Q FY18
1Q FY17
YoY%
4Q FY17
QoQ%
Comments
Yes Bank
NII
17,014
13,166
29.2
16,397
3.8
Other Income
11,042
9,005
22.6
12,574
(12.2)
Operating Profit
16,486
13,068
26.2
16,910
(2.5)
8,973
7,318
22.6
9,141
(1.8)
24.6
17.4
41.3
21.6
13.9
24,987
22,831
9.4
29,927
(16.5)
3,792
9,841
(61.5)
2,839
33.6
Operating Profit
25,293
20,017
26.4
26,668
PAT
18,084
18,707
(3.3)
20,442
(11.5)
11.4
11.8
(3.3)
12.9
(11.2)
13,188
13,461
(2.0)
14,087
(6.4)
173
167
3.8
240
(27.9)
10,400
10,287
1.1
11,423
(9.0)
4,024
3,741
7.6
1,496
168.9
17.7
16.5
7.6
6.6
168.7
PAT
EPS (Rs)
ff NII is expected to be positively impacted owing to strong growth in loan book and decline in
wholesale cost of fund.
ff Credit cost would see marginal sequential rise due to higher exposure to stressed sectors.
HDFC
NII
Other Income
EPS (Rs)
ff Loan book growth is expected to remain healthy led by growth in both individual and non
individual segments.
ff Spread is expected to remain sequentially stable.
(5.2)
ff Other income will continue to grow in line with balance sheet growth.
Shriram Transport Fin
NII
Other Income
Operating Profit
PAT
EPS (Rs)
ff Continuous moderation of cost of fund will help the Company to deliver better growth on NII
front.
ff Overall improved operating environment is expected to result in better operating
performance.
ff However, credit cost is expected to remain elevated owing to moving to 90 days NPA
recognition.
Source: Company, RSec Research
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Banking Sector
Institutional Equity Research
Results Preview | July 10,2017
Exhibit 2: Valuation Table
Company
CMP*
Reco
(Rs)
Axis Bank
Target Price
Mkt. Cap
RoE (%)
(Rs)
(Rs bn)
FY16
RoA (x)
FY17E
FY18E
FY16
FY17E
P/ABV (x)
FY18E
MRQ
FY17E
FY18E
503
HOLD
502
1,206
6.6
7.5
10.9
0.7
0.7
1.0
2.6
2.4
2.2
161
BUY
207
370
3.4
3.4
5.6
0.2
0.2
0.3
1.7
1.6
1.3
Canara Bank
346
HOLD
384
207
3.3
3.3
4.6
0.2
0.2
0.3
1.7
1.6
1.3
DCB Bank
194
BUY
207
60
9.1
9.1
12.9
0.9
0.9
1.1
2.4
2.3
2.0
Federal Bank
116
BUY
125
225
9.3
9.3
10.7
0.8
0.8
0.8
2.1
2.0
1.8
Bank of Baroda
HDFC Bank
1,667
BUY
1,833
4,291
16.3
16.3
16.7
1.9
1.9
1.9
4.9
4.1
3.5
ICICI Bank
290
HOLD
287
1,858
9.8
9.8
7.0
1.3
1.3
0.9
2.5
2.4
2.2
India Bank
299
BUY
341
144
8.2
8.2
8.8
1.0
1.0
1.1
1.2
1.1
1.0
1,524
BUY
1,716
912
13.9
13.9
15.1
1.8
1.8
1.8
4.5
3.9
3.3
965
BUY
1,010
1,836
12.4
12.4
14.3
2.5
2.5
3.0
5.8
5.1
4.4
Punjab National Bank
144
HOLD
167
307
3.2
3.2
5.9
0.2
0.2
0.3
3.4
4.4
2.4
State Bank of India
280
BUY
355
2,418
5.6
5.6
5.1
0.4
0.4
0.4
1.7
1.0
1.0
YES Bank
1,506
HOLD
1,483
689
15.1
15.1
16.2
1.8
1.8
1.8
3.3
2.8
2.4
HDFC
1,629
BUY
1,786
2,595
17.4
17.4
18.9
2.2
2.2
2.4
6.8
5.9
5.2
Shriram Transport Finance
1,090
BUY
1,159
247
11.7
11.7
14.7
1.8
1.8
2.3
2.5
2.1
1.8
Indusind Bank
Kotak Mahindra Bank
Source: Company, RSec Research; Note: * CMP as on July 07, 2017
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Banking Sector
Institutional Equity Research
Results Preview | July 10,2017
Rating Guides
Rating
BUY
HOLD
REDUCE
Expected absolute returns (%) over 12 months
>10%
-5% to 10%
>-5%
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