Q3FY2015 consumer goods & services earnings review

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February 23, 2015
Q3FY2015 Banking earnings review
Key points
Š 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.
Š 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.
Š 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
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sector update
Q3FY2015 Banking earnings review
Valuations
Banks
Public
State Bank of India
Punjab National Bank
Bank of Baroda
Bank of India
Union Bank
Corporation Bank
Andhra Bank
Allahabad Bank
IDBI Bank
Private
ICICI Bank
HDFC Bank
Axis Bank
Federal Bank
Yes Bank
Private banks total / avg.
Grand total / avg.
NBFCs
HDFC Ltd
LIC Housing Finance
Capital First
Bajaj Finance
PTC India Fin. Ser.
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
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sector update
4
February 23, 2015