Key things to watch out for in Q4 earnings: Higher stresses for banks which reported lower than peer AQR (asset quality review) related stress in Q3; higher treasury gains which could be used to buffer higher credit costs— especially by PSUs; tier 1 relief of up to 70bps based on recent revisions announced by RBI.
Macro & financial trends: With economic and credit growth remaining sluggish and seasonal liquidity tightness pushing short rates upward, the only positive macro development has been the 25bps fall in long bond yields during the quarter. Financially, the biggest difference between PSU and PVT banks is likely to be mainly on two fronts–slower loan growth and higher margin pressure for the former—resulting in weak top line growth that flows all the way to the bottom line, a decline of 56% y-o-y for the PSUs versus 20% growth in loans as well as profits for the PVT banks.
Asset quality worsening and market share shift to continue: All our coverage PSU banks (except BoB (BOB IN,
R147, Hold) and ICICI Bank (ICICI BC IN, R238, Buy,) have indicated Q4 level of slippages similar to that reported in Q3FY16, which should see credit costs remaining elevated.
Even as system loan growth remained soft in Q3FY16 (11.3% y-o-y), we expect PVT banks to continue to garner market share at the expense of PSU banks, growing their loan book by 20% vs 5% for PSU banks, with smaller PVT banks growing even quicker.
Capital release and lower bond yields to provide some relief: PSU banks are likely to breathe easier on capital as RBI recently relaxed Basel 3 norms which we estimate will add
c.R130 bn of equity capital to our covered PSUs implying an addition of c13-72bp to CET1 but the revaluation of assets could take more time for some banks. In addition, bond yields have declined by c25bps during the quarter creating an opportunity for banks to boost treasury income and partly buffer the higher provisioning that is anticipated.
Prefer PVT banks: We prefer PVT over PSU banks given their healthier balance sheets and better earnings’ visibility. We prefer a barbell approach which includes HDFC Bank (HDFCB IN, R1,065, Buy,
R1,300) among defensives and YES Bank (YES IN, R866, Buy, TP R1,041) as a rerating opportunity. BoI (BOI IN, R97, Reduce, TP R54) remains our least preferred stock given continuing earnings deterioration.