A HDFC Securities Institutional Research previews first quarter results of banking sector for fiscal 2018
The improved performance of the banking industry in India has helped the economy to bounce back to a positive growth level. According to the Reserve Bank of India (RBI), the banking sector in India is sound, adequately capitalized and well-regulated.
Indian financial and economic conditions are much better than in many other countries of the world. Various credit, market and liquidity risk studies show that Indian banks are generally resilient and have withstood the global downturn well. For the quarter ended in June 2017, divergent performance of the banking sector is expected to continue.
Muted Growth and Stable Asset Quality for Public sector banks
The suppressed loan growth and elevated provisions will impair the performance for Public Sector Banks (PSBs) for yet another quarter. In the first quarter of 2018, the current account and savings account ratio (CASA) is expected to be under pressure due to higher withdrawals and a shift to total deposits (TD).
On a positive note, the net interest margins (NIMs) are expected to be stable and the gross additions to stressed assets are expected to lower sequentially. What this means is that the banks are properly channelizing its liabilities or deposits that generate significant interest income from growth in credit.
Bank of Baroda (BoB)
For BoB, a gradual increase in loan growth of 3 to 5 percent is expected driven by the corporate and retail segments. Despite a higher provision coverage ratio, provisions are expected to remain elevated. Its net earnings are expected to decline by 50 percent on year to year basis and increase by 36 percent on quarter to quarter basis. However, the key risk for Bank of Baroda is the consolidation of the public sector banks.
State Bank of India’s (SBIN) profitability is not comparable sequentially, due to the merger of five associate banks. On a year to year basis, net earnings are expected to grow at 4.7 times due to a smaller base. Its asset quality including movement, watch-list and resolutions remains key monitorable.
Mixed Show by Private Banks
Except City Union Bank, the retail-oriented and Tier II private banks are expected to perform better. They will continue their superior performance, steady loan growth, healthy and stable NIMs and precise asset quality trends.
The corporate-heavy banks are expected to report subdued performance in the first quarter, slower loan growth, accelerated loan loss provision, compressed NIMs and muted fees, even though some of these banks have superior provision coverage ratio (PCR). Asset quality issues are expected to persist especially in Axis Bank.
The aspects to lookout for in the private banks are commentary on resolutions, deal in a couple of large exposures and the watch list movement.
Kotak Mahindra Bank
Its pre-provision operating profit (PPOP) is expected to grow 22 percent on year to year basis with controlled operating expenses (Opex) and steady growth in non-interest income. Its key monitorables are trends in savings accounts growth, efficiency and its subsidiary performance especially Kotak Mahindra Prime.
IndusInd Bank
The profitability and core earnings growth of bank is expected to be 26 percent and driven by healthy loan growth of 25 percent and stable NIMs. Its PPOP growth will be healthy and led by NII and noninterest income growth.
Federal Bank
The bank’s growth momentum will be sustainable and driving NII growth of 22%. On sequential basis, the non-interest income will see a sharp decline, led by fees and treasury income. The profit after tax (PAT) for the bank is expected to Rs 240 crore after a sharp decline in provisions. The key areas to look out for the bank are: movement in the net interest margins, improvement in efficiency ratios, asset quality and its sustained growth specifically in the small and medium enterprises post the implementation of GST.
Muted Quarter for Small finance banks
Ujjivan Financial Services, a non-banking financial company, is the holding company of the small finance bank. The earnings for both Ujjivan and Equitas small finance bank are expected to remain silent. The loan growth is expected to be 3 to 4 percent on quarter to quarter basis; a mix between micro-finance institutions (MFI) and non- micro finance institutions. One of the key aspects is the improvement in the collection efficiency in MFIs book. However, provisioning would remain elevated due to ageing of delinquencies.
Opex is expected to increase further as new branches roll out. Although there are intermediate challenges as Equitas reduces its share of MF book and increasing opex, despite this, the HDFC Securities remain positive on the company due to its diversified book.
Strong Quarter for Vehicle Finance NBFCs
Overall it will be strong quarter for non-banking financial companies (NBFCs) with improvement in Net Interest Income (NII), profitability expected to increase and register loan book growth.
For LIC Housing finance, narrow spreads are expected due to the higher pressure on yield also balance transfer related pressure is expected.
Despite a seasonally weak quarter, Cholamandalam Investments and Finance (CIFC) is expected to report a relatively healthy quarter. This is led by steady disbursal growth, asset under management growth, margin and operational efficiency improvement and relatively better asset quality performance.
After factoring 23 percent increase in its opex- led by staff cost and depreciation –PPOP for CIFC is expected to grow by 15 percent on year to year basis. On the checklist for CIFC are the performance in the HE(LAP) business and traction in the vehicle finance business.
REPCO Home Finance has huge business opportunities in the affordable housing space; its gross non-performing assets (GNPAs) will increase sequentially. The prepayment rate and asset quality recovery are its key measurables.