Moderation in earnings to continue. Operating performance is likely to witness further moderation even as we see earnings for banks declining 10% yoy. MTM provisions and staff expenses will hurt public banks while slowing revenue growth and higher credit costs will affect most private banks. We expect loan impairment ratios to remain stable qoq. Non-banks will likely report 7-20% growth in core earnings; marginally lower loan growth and NIM will affect NII growth; retail disbursements are likely to be weak for most players. We would be negative on ICICI Bank and HDFC Bank at these levels.
Earnings moderation persists; private banks to bear the brunt of slowdown as well
We see earnings declining 10% yoy in 3QFY14 with public banks likely to report a decline of 27% yoy while private banks would see a moderation from >20% growth for the past 15 quarters to ~9% yoy growth. Revenue growth is likely to moderate to 12% yoy; we believe the impact would be stronger for private banks. While private banks would see NII growth slowing down
Wages and MTM provisions to hurt public banks; rising loan-loss provisions to hurt private banks
We see diverging trends in earnings compression between private and public banks. Operating leverage would be negative for public banks as they make higher provision for (1) revised wage settlement/changes to the annuity tables and (2) MTM provisions for investments. Private banks, on the other hand, are likely to witness credit costs rising (>40% yoy) as NPLs/restructuring have begun in their corporate portfolio. Public banks are likely to report moderate growth in credit costs (3% yoy) as NPLs are likely to be stable with better trends likely to emerge in the agriculture portfolio. Fresh restructuring is likely to remain at previous-quarter levels. Implementation of the FRP (financial restructuring plan) for SEBs would imply select banks witnessing a reduction in their restructured portfolio, which would allow them to utilize those provisions elsewhere.
Various one-offs supported earnings in previous quarter but likely to hurt in current quarter
Various public and private banks delayed the recognition of MTM loss by interpreting the RBI’s circular differently, resulting in lower provisions in the previous quarter. Select private banks had one-off benefits like dividend repatriation, income from swaps, high forex income, etc., which are unlikely to be repeated this quarter. With interest rates having broadly remained at levels seen in the previous quarter, the provisions are likely to rise sharply.
NBFCs: Core business traction weak
We expect most NBFCs to deliver 7-20% yoy growth in core earnings during 3QFY14. NII growth will likely weaken on the back of NIM compression and lower loan growth. High-cost borrowings (raised in 2QFY14) and increase in cash on balance sheet drive NIM compression. We expect loan growth to moderate across the board (3-28% yoy loan growth in 3QFY14 versus 3-32% in 2QFY14). According to industry sources, disbursements growth across retail segments was muted (0-10%) in October and November 2013, likely leading to pressure on disbursements and loan growth for NBFCs. While quarterly trends observed in 3Q will set the tone for near-term business traction, outlook on growth and interest rates and bank licenses (expected to be announced in 4QFY14) will be more crucial stock sensitivities.
Loan growth weakening across segments
We expect loan growth for most NBFCs to moderate to 3-28% yoy in 3QFY14 versus 3-32% in 2QFY14. According to market sources, retail loan disbursements were weak (0-10% across loan categories during the first two months of the quarter).
} In the auto segment, new CV sales continued to be weak. MHCV and LCV sales are expected to be down ~33% yoy and ~22% yoy respectively, based on sales trend in October-November 2013. We expect overall domestic car sales to decline ~4% yoy, based on sales data released by major auto players and trends over the past two months. Tractors was the only segment to grow—is expected to report ~20% yoy growth in 3QFY14. We expect higher tractor sales to drive business for Mahindra Finance (we model about 10% disbursements growth during 3QFY14 as compared to 5% in 2QFY14). Severe slowdown in CVs and base effect of shifting focus to newer used CVs will pull down disbursements for Shriram Transport Finance.
} According to market sources, retail mortgages disbursements have reported low (0-10%) growth for most players; we expect retail disbursements for LICHF to be almost flat yoy in 3QFY14 (flat in 2QFY14); HDFC does not provide a break-up of disbursements between retail and non-retail businesses, but has guided for moderation in retail growth.
} We expect disbursements for PFC and REC to remain weak as the lending for transitional finance (to SEBs) reduces. PFC reported flat disbursements in 1HFY14 while REC reported 15% growth in disbursements in 1HFY14 as compared to 40% disbursements growth in FY2013.
} IDFC has guided for flat loan book in FY2014E; we don’t expect business for IDFC to pick up in the current environment.
Volatility in debt markets, NBFCs’ margins relatively stable
We expect NIM for most NBFCs to decline by 10-40 bps qoq in 3QFY14 on the back of
10-90 bps qoq decline in 2QFY14. The bulk borrowings market was volatile in 1HFY14; interest rates were soft in 1Q and hardened in 2Q on the back of regulatory move to tighten liquidity. Marginal borrowings cost of NBFCs (mostly AAA and AA-rated entities) increased in the range of 1.5-3% in 2QFY14. While marginal borrowings cost declined by 1-1.5% for most players in 3QFY14, the impact of high-cost borrowings (raised in 2QFY14) and increase in surplus cash on balance sheet will likely pull down NIM in 3QFY14.
NPL trends crucial
NBFCs have reported lower NPLs as compared to banks but the trend has been steadily deteriorating over the past few quarters.
} Housing finance companies will likely report stable NPLs in the retail book; the developer loan book has selectively seen stress.
} IDFC has guided for higher NPLs (1.5% gross NPLs by March 2014 as compared to 0.3% in 2QFY14). PFC and REC have not reported rise in NPL though loan reschedulements have increased.
} Mahindra Finance has reported 60% rise in NPLs between March and September 2013, we expect lower slippages in 3Q though the trends will likely remain weak.
} We expect higher NPLs in CV finance during 3QFY14 even though slippages may not be high. According to market sources, strong monsoon in July/August had reduced collections in 2Q; collection efficiency has picked up in 3QFY14, though remains weak.
Banks: Loan growth to moderate from 2QFY14 levels
While the previous quarter saw public banks lending aggressively replacing the short-term instruments like commercial paper due to liquidity crunch, the current quarter is likely to see moderation from those levels. As of December 13, 2013, loan growth has already slipped but discussions with banks indicate that these are disbursements of earlier sanctions and fresh lending to SEBs as a part of the restructuring package (FRP) that was agreed upon earlier. Retail-oriented banks like HDFC Bank and IndusInd Bank are likely to see a moderation in loan growth as demand remains moderate and expansion from improvement in market share is unlikely as most banks have shifted focus to retail.
Select banks with a large international presence or with significant non-resident population (SBI, BoB, BoI, ICICI Bank, HDFC Bank, Axis Bank and Federal Bank) have witnessed strong flow in FCNR deposits. Through product structuring, we understand that select banks have given leverage to their customers, which should give some cushion to loan growth.
Full impact of the increase in costs to reflect in current quarter; SBI and ICICI Bank well-positioned
We believe that NIM would remain under pressure for almost all banks as the full impact of the sharp rise in deposit costs would reflect in the current quarter and very few banks have taken hikes in base rate to offset the increase in costs. Barring SBI and ICICI Bank, who have taken increase in base rates, we believe most banks should report a flat NIM qoq or a marginal decline.
A trend that we note is that the moderation to NIM that public banks have witnessed in recent quarters should ease in the current quarter, resulting in NII growth closer to loan growth. We see NII growth steadily improving from ~0% in 4QFY13 to 13% in 3QFY14 and we expect this trend to be maintained for another quarter. Private banks, on the other hand, should see further slowdown
We see strong growth in NII for SBI and ICICI Bank as they increased their base rate recently. Axis Bank and IndusInd Bank would see further moderation as the benefit of the capital raised in the previous year is likely to hurt these banks from here. Strong growth in NII for BoI and Canara Bank is a reflection of growth strategy adopted rather than margin expansion. BoB is likely to remain disappointing for another quarter as they have a large share of business in the international portfolio, where NIMs have collapsed in recent quarters.
Outlook on growth in non-interest income remains weak; investment provision to hurt public banks
We expect growth in non-interest income to remain weaker than 2QFY14 levels. Core fee income growth would be muted as loan-related activity levels remain disappointing. Private banks saw strong income from forex in the previous quarter, which is unlikely to be repeated given the lower volatility of the currency this quarter. Retail fee income trends are likely to be higher than corporate fee income but overall growth is likely to be weaker than non-interest income growth.
Treasury income unlikely to improve this quarter; provisions to remain high
We expect treasury income to remain weaker qoq as yields have remained sticky with an upward bias. 1-year yield declined ~30 bps qoq but 5-year and 10-year increased by ~10 bps qoq.
We expect overall provisions to remain high as most public banks had made relatively lower provisions in the previous quarter, as they adopted the regulatory forbearance which allowed them to amortize their losses across three quarters instead of the previous quarter. Our calculations indicate that the losses in the portfolio that have been booked so far are ~20% of the total loss, indicating that the provisions in 2HFY14 would remain high. BoI, Canara Bank, SBI and OBC are likely to see a sharp rise in provisions as they have probably been the most aggressive. Federal Bank, Union Bank and IndusInd Bank have amortized only 14% of their total losses.
Loan impairment ratios could be better for public but worsening for private
Our broad discussions with the management of public and private banks show a different trends emerging for public and private banks.
While loan impairment ratios would remain high, there could be a possible improvement for public banks this quarter with lower slippages and fresh restructuring than the previous quarter. The improvement is being led by a few factors—(1) substantial improvement in agriculture portfolio as the strong monsoon has resulted in better productivity and fear of loan waiver has receded, (2) select sectors like iron and steel and textiles have started to stabilize or show a marginal improvement, (3) regulators and GoI have asked banks to aggressively focus on recovery as compared to growth and (4) there have been no noticeable accounts like that of gems and jewelry slipping in the current quarter.
Loan impairment ratios could also remain stable qoq for a few factors —(1) banks are looking to sell down NPL or negotiate with borrowers for a settlement and (2) implementation of FRP package to result in loans moving to the investment portfolio. SEB loans form about ~25% of the total restructured loans, of which ~50% was restructured as of 2QFY14.
We believe private banks are likely to show weaker trends on loan impairment ratios, which would result in credit costs rising >40% yoy. Most private banks reported very low credit costs in 3QFY13, which is likely to result in weak earnings performance. The impact would also be felt in HDFC Bank where the slippages in select retail portfolios continue to rise while change in loan mix towards unsecured loans increases product-specific charges.
We retain a cautious view on asset quality as loan impairments are likely to remain volatile, emerging from large-ticket corporate exposures. We expect credit costs to remain at elevated levels, 1% for public banks and 0.9% for private banks, on the back of fresh delinquencies, dynamic provisions and improvement in coverage ratio.
Earnings moderation persists; private banks to bear the brunt of slowdown as well
We see earnings declining 10% yoy in 3QFY14 with public banks likely to report a decline of 27% yoy while private banks would see a moderation from >20% growth for the past 15 quarters to ~9% yoy growth. Revenue growth is likely to moderate to 12% yoy; we believe the impact would be stronger for private banks. While private banks would see NII growth slowing down
Wages and MTM provisions to hurt public banks; rising loan-loss provisions to hurt private banks
We see diverging trends in earnings compression between private and public banks. Operating leverage would be negative for public banks as they make higher provision for (1) revised wage settlement/changes to the annuity tables and (2) MTM provisions for investments. Private banks, on the other hand, are likely to witness credit costs rising (>40% yoy) as NPLs/restructuring have begun in their corporate portfolio. Public banks are likely to report moderate growth in credit costs (3% yoy) as NPLs are likely to be stable with better trends likely to emerge in the agriculture portfolio. Fresh restructuring is likely to remain at previous-quarter levels. Implementation of the FRP (financial restructuring plan) for SEBs would imply select banks witnessing a reduction in their restructured portfolio, which would allow them to utilize those provisions elsewhere.
Various one-offs supported earnings in previous quarter but likely to hurt in current quarter
Various public and private banks delayed the recognition of MTM loss by interpreting the RBI’s circular differently, resulting in lower provisions in the previous quarter. Select private banks had one-off benefits like dividend repatriation, income from swaps, high forex income, etc., which are unlikely to be repeated this quarter. With interest rates having broadly remained at levels seen in the previous quarter, the provisions are likely to rise sharply.
NBFCs: Core business traction weak
We expect most NBFCs to deliver 7-20% yoy growth in core earnings during 3QFY14. NII growth will likely weaken on the back of NIM compression and lower loan growth. High-cost borrowings (raised in 2QFY14) and increase in cash on balance sheet drive NIM compression. We expect loan growth to moderate across the board (3-28% yoy loan growth in 3QFY14 versus 3-32% in 2QFY14). According to industry sources, disbursements growth across retail segments was muted (0-10%) in October and November 2013, likely leading to pressure on disbursements and loan growth for NBFCs. While quarterly trends observed in 3Q will set the tone for near-term business traction, outlook on growth and interest rates and bank licenses (expected to be announced in 4QFY14) will be more crucial stock sensitivities.
Loan growth weakening across segments
We expect loan growth for most NBFCs to moderate to 3-28% yoy in 3QFY14 versus 3-32% in 2QFY14. According to market sources, retail loan disbursements were weak (0-10% across loan categories during the first two months of the quarter).
} In the auto segment, new CV sales continued to be weak. MHCV and LCV sales are expected to be down ~33% yoy and ~22% yoy respectively, based on sales trend in October-November 2013. We expect overall domestic car sales to decline ~4% yoy, based on sales data released by major auto players and trends over the past two months. Tractors was the only segment to grow—is expected to report ~20% yoy growth in 3QFY14. We expect higher tractor sales to drive business for Mahindra Finance (we model about 10% disbursements growth during 3QFY14 as compared to 5% in 2QFY14). Severe slowdown in CVs and base effect of shifting focus to newer used CVs will pull down disbursements for Shriram Transport Finance.
} According to market sources, retail mortgages disbursements have reported low (0-10%) growth for most players; we expect retail disbursements for LICHF to be almost flat yoy in 3QFY14 (flat in 2QFY14); HDFC does not provide a break-up of disbursements between retail and non-retail businesses, but has guided for moderation in retail growth.
} We expect disbursements for PFC and REC to remain weak as the lending for transitional finance (to SEBs) reduces. PFC reported flat disbursements in 1HFY14 while REC reported 15% growth in disbursements in 1HFY14 as compared to 40% disbursements growth in FY2013.
} IDFC has guided for flat loan book in FY2014E; we don’t expect business for IDFC to pick up in the current environment.
Volatility in debt markets, NBFCs’ margins relatively stable
We expect NIM for most NBFCs to decline by 10-40 bps qoq in 3QFY14 on the back of
10-90 bps qoq decline in 2QFY14. The bulk borrowings market was volatile in 1HFY14; interest rates were soft in 1Q and hardened in 2Q on the back of regulatory move to tighten liquidity. Marginal borrowings cost of NBFCs (mostly AAA and AA-rated entities) increased in the range of 1.5-3% in 2QFY14. While marginal borrowings cost declined by 1-1.5% for most players in 3QFY14, the impact of high-cost borrowings (raised in 2QFY14) and increase in surplus cash on balance sheet will likely pull down NIM in 3QFY14.
NPL trends crucial
NBFCs have reported lower NPLs as compared to banks but the trend has been steadily deteriorating over the past few quarters.
} Housing finance companies will likely report stable NPLs in the retail book; the developer loan book has selectively seen stress.
} IDFC has guided for higher NPLs (1.5% gross NPLs by March 2014 as compared to 0.3% in 2QFY14). PFC and REC have not reported rise in NPL though loan reschedulements have increased.
} Mahindra Finance has reported 60% rise in NPLs between March and September 2013, we expect lower slippages in 3Q though the trends will likely remain weak.
} We expect higher NPLs in CV finance during 3QFY14 even though slippages may not be high. According to market sources, strong monsoon in July/August had reduced collections in 2Q; collection efficiency has picked up in 3QFY14, though remains weak.
Banks: Loan growth to moderate from 2QFY14 levels
While the previous quarter saw public banks lending aggressively replacing the short-term instruments like commercial paper due to liquidity crunch, the current quarter is likely to see moderation from those levels. As of December 13, 2013, loan growth has already slipped but discussions with banks indicate that these are disbursements of earlier sanctions and fresh lending to SEBs as a part of the restructuring package (FRP) that was agreed upon earlier. Retail-oriented banks like HDFC Bank and IndusInd Bank are likely to see a moderation in loan growth as demand remains moderate and expansion from improvement in market share is unlikely as most banks have shifted focus to retail.
Select banks with a large international presence or with significant non-resident population (SBI, BoB, BoI, ICICI Bank, HDFC Bank, Axis Bank and Federal Bank) have witnessed strong flow in FCNR deposits. Through product structuring, we understand that select banks have given leverage to their customers, which should give some cushion to loan growth.
Full impact of the increase in costs to reflect in current quarter; SBI and ICICI Bank well-positioned
We believe that NIM would remain under pressure for almost all banks as the full impact of the sharp rise in deposit costs would reflect in the current quarter and very few banks have taken hikes in base rate to offset the increase in costs. Barring SBI and ICICI Bank, who have taken increase in base rates, we believe most banks should report a flat NIM qoq or a marginal decline.
A trend that we note is that the moderation to NIM that public banks have witnessed in recent quarters should ease in the current quarter, resulting in NII growth closer to loan growth. We see NII growth steadily improving from ~0% in 4QFY13 to 13% in 3QFY14 and we expect this trend to be maintained for another quarter. Private banks, on the other hand, should see further slowdown
We see strong growth in NII for SBI and ICICI Bank as they increased their base rate recently. Axis Bank and IndusInd Bank would see further moderation as the benefit of the capital raised in the previous year is likely to hurt these banks from here. Strong growth in NII for BoI and Canara Bank is a reflection of growth strategy adopted rather than margin expansion. BoB is likely to remain disappointing for another quarter as they have a large share of business in the international portfolio, where NIMs have collapsed in recent quarters.
Outlook on growth in non-interest income remains weak; investment provision to hurt public banks
We expect growth in non-interest income to remain weaker than 2QFY14 levels. Core fee income growth would be muted as loan-related activity levels remain disappointing. Private banks saw strong income from forex in the previous quarter, which is unlikely to be repeated given the lower volatility of the currency this quarter. Retail fee income trends are likely to be higher than corporate fee income but overall growth is likely to be weaker than non-interest income growth.
Treasury income unlikely to improve this quarter; provisions to remain high
We expect treasury income to remain weaker qoq as yields have remained sticky with an upward bias. 1-year yield declined ~30 bps qoq but 5-year and 10-year increased by ~10 bps qoq.
We expect overall provisions to remain high as most public banks had made relatively lower provisions in the previous quarter, as they adopted the regulatory forbearance which allowed them to amortize their losses across three quarters instead of the previous quarter. Our calculations indicate that the losses in the portfolio that have been booked so far are ~20% of the total loss, indicating that the provisions in 2HFY14 would remain high. BoI, Canara Bank, SBI and OBC are likely to see a sharp rise in provisions as they have probably been the most aggressive. Federal Bank, Union Bank and IndusInd Bank have amortized only 14% of their total losses.
Loan impairment ratios could be better for public but worsening for private
Our broad discussions with the management of public and private banks show a different trends emerging for public and private banks.
While loan impairment ratios would remain high, there could be a possible improvement for public banks this quarter with lower slippages and fresh restructuring than the previous quarter. The improvement is being led by a few factors—(1) substantial improvement in agriculture portfolio as the strong monsoon has resulted in better productivity and fear of loan waiver has receded, (2) select sectors like iron and steel and textiles have started to stabilize or show a marginal improvement, (3) regulators and GoI have asked banks to aggressively focus on recovery as compared to growth and (4) there have been no noticeable accounts like that of gems and jewelry slipping in the current quarter.
Loan impairment ratios could also remain stable qoq for a few factors —(1) banks are looking to sell down NPL or negotiate with borrowers for a settlement and (2) implementation of FRP package to result in loans moving to the investment portfolio. SEB loans form about ~25% of the total restructured loans, of which ~50% was restructured as of 2QFY14.
We believe private banks are likely to show weaker trends on loan impairment ratios, which would result in credit costs rising >40% yoy. Most private banks reported very low credit costs in 3QFY13, which is likely to result in weak earnings performance. The impact would also be felt in HDFC Bank where the slippages in select retail portfolios continue to rise while change in loan mix towards unsecured loans increases product-specific charges.
We retain a cautious view on asset quality as loan impairments are likely to remain volatile, emerging from large-ticket corporate exposures. We expect credit costs to remain at elevated levels, 1% for public banks and 0.9% for private banks, on the back of fresh delinquencies, dynamic provisions and improvement in coverage ratio.
