Not so weak

* What appeared to be ‘weak’ spots in Q3 results, we believe are not so; Core PBT (profit before tax) growth remains robust at 20% plus

* While retail loans are slowing, wholesale is making up; margins and asset quality too likely to remain steady leading to 25-30% PAT growth up to FY15e (estimates)

* Reiterate OW (overweight) rating with target price revised up 6% to R787 (from R741) implying potential returns of 20%

Q3FY13 earnings surprised a bit on the higher treasury gains, weakish margins and NPL (non-performing loans) increase, although at the net profit level there wasn’t any. The stock ended 0.5% down recovering after a steeper fall immediately post-results.

Operational review: While loan growth came in reasonable at 24% (especially considering system growth at 15-16%), there are signs of weakening retail growth across most categories but offset by improving wholesale loan growth. Margins too came in 10bps lower quarter-on-quarter as CASA (current account savings account) mix marginally declined to 45.4%.

Also, on the NPL front although the ratio came in steady at 1.0%, the bulk of the increase came from the retail book, including the commercial vehicle book, leading to market concerns about growth and profitability prospects going ahead. Credit costs remained fairly steady at 54 bps leading to 30% profit growth. However, core PBT growth (ex-treasury gains) was a robust 21% with trends remaining firm.

Earnings outlook: Despite building in a declining CASA (to 43% by FY15e), we believe margins will be

... contd.