More on hope than reported performance. 4QFY14 could be defined as a quarter where price appreciation deviated sharply from reported performance with key metrics showing limited improvement, as expectations of a recovery is running high. Public banks have started to report better NII growth giving them adequate headroom for provisions. NPL decline has been led by sell-down to ARCs than recoveries/upgradation. No change in our preferred ideas: ICICI Bank, Federal Bank, SBI, Bajaj Finserv and LICHF.
A gradual recovery in top line for public banks while private banks continue their downward trend
4QFY14 recorded a flattish performance on earnings (2% yoy) though the trend is moving in the positive direction. Loan growth (under coverage) was at 17% yoy (public and private) but the differentiating performance between public and private banks was on NII (net interest income) growth. NII grew 15% yoy with public banks reporting an upward trajectory (fourth consecutive quarter) while private banks continued to report a slowdown (for the past eight quarters) at 16% yoy. Cost grew at the slowest pace primarily led by a few one-off events.
Impairment ratios moderate led by sales of NPLs; fresh impairments high
Fresh impairments remained high but at broadly similar levels to 2Q/3QFY14 levels with slippages at 2.8% and fresh restructuring at 2.6% of loans. For stocks under coverage, gross NPLs declined 20 bps qoq to 3.5% and restructured loans were flat qoq at 5.1% of loans. A large part of this improvement could be led by NPLs sold to ARCs (asset reconstruction companies). Most public banks reported an improvement in provision coverage qoq as the healthy revenue growth provided some headroom for higher provisions. The commentary from private banks suggests that FY2015 is likely to see moderation in fresh impairments from FY2014 levels though the situation at the sectoral level could be a bit different, especially with the recent guidelines on formation of JLF etc.
Recent price action leaves limited room for price appreciation in frontline names
We saw limited upgrades this quarter (KVB and ING Vysya Bank to BUY from ADD) but have increased our target prices sharply as the probability of an improvement in economic scenario appears to be high. The benefit of this change from an earnings perspective is likely to reflect in FY2016 and RoEs improvement (140 bps) in FY2015 to 15% is primarily due to lower loss in the investment portfolio. Valuations for private banks are reaching closer to our fair values, leaving limited upside appreciation and the pace of earnings upgrades could be critical from here. We like ICICI Bank and Axis Bank. We see scope for valuation expansion in the mid-tier regional banks like ING Vysya, Federal Bank and KVB. Among public banks, we maintain our positive rating on SBI. The room for disappointment is fairly high if the recovery in economic environment is slower than expected.
NBFCs: business remains weak, no sign of turnaround
Most NBFCs reported weak earnings growth during 4QFY14 on the back of slowing growth, higher NPLs (specifically in auto finance) and NIM compression. On a qoq basis, NIM and NPL improved largely tracking seasonal trends. 4QFY14 results did not show any sign of turnaround or recovery in the business. NBFCs are strong plays on economic recovery and current stock prices already factor a favorable business environment to some extent. While the economic turnaround benefits all players, we favor well-managed companies with relatively stable business models. We like Bajaj Finserv, Cholamandalam, IDFC, LIC Housing Finance and Magma Fincorp in our coverage universe.
A gradual recovery in top line for public banks while private banks continue their downward trend
4QFY14 recorded a flattish performance on earnings (2% yoy) though the trend is moving in the positive direction. Loan growth (under coverage) was at 17% yoy (public and private) but the differentiating performance between public and private banks was on NII (net interest income) growth. NII grew 15% yoy with public banks reporting an upward trajectory (fourth consecutive quarter) while private banks continued to report a slowdown (for the past eight quarters) at 16% yoy. Cost grew at the slowest pace primarily led by a few one-off events.
Impairment ratios moderate led by sales of NPLs; fresh impairments high
Fresh impairments remained high but at broadly similar levels to 2Q/3QFY14 levels with slippages at 2.8% and fresh restructuring at 2.6% of loans. For stocks under coverage, gross NPLs declined 20 bps qoq to 3.5% and restructured loans were flat qoq at 5.1% of loans. A large part of this improvement could be led by NPLs sold to ARCs (asset reconstruction companies). Most public banks reported an improvement in provision coverage qoq as the healthy revenue growth provided some headroom for higher provisions. The commentary from private banks suggests that FY2015 is likely to see moderation in fresh impairments from FY2014 levels though the situation at the sectoral level could be a bit different, especially with the recent guidelines on formation of JLF etc.
Recent price action leaves limited room for price appreciation in frontline names
We saw limited upgrades this quarter (KVB and ING Vysya Bank to BUY from ADD) but have increased our target prices sharply as the probability of an improvement in economic scenario appears to be high. The benefit of this change from an earnings perspective is likely to reflect in FY2016 and RoEs improvement (140 bps) in FY2015 to 15% is primarily due to lower loss in the investment portfolio. Valuations for private banks are reaching closer to our fair values, leaving limited upside appreciation and the pace of earnings upgrades could be critical from here. We like ICICI Bank and Axis Bank. We see scope for valuation expansion in the mid-tier regional banks like ING Vysya, Federal Bank and KVB. Among public banks, we maintain our positive rating on SBI. The room for disappointment is fairly high if the recovery in economic environment is slower than expected.
NBFCs: business remains weak, no sign of turnaround
Most NBFCs reported weak earnings growth during 4QFY14 on the back of slowing growth, higher NPLs (specifically in auto finance) and NIM compression. On a qoq basis, NIM and NPL improved largely tracking seasonal trends. 4QFY14 results did not show any sign of turnaround or recovery in the business. NBFCs are strong plays on economic recovery and current stock prices already factor a favorable business environment to some extent. While the economic turnaround benefits all players, we favor well-managed companies with relatively stable business models. We like Bajaj Finserv, Cholamandalam, IDFC, LIC Housing Finance and Magma Fincorp in our coverage universe.
