Currently, banks (particularly, corporate lenders) are in VUCA phase (volatility, uncertainty, complexity, ambiguity) in the backdrop of: (i) Reserve Bank of India’s revised stress recognition framework leading to upfronting of credit cost; (ii) sudden mushrooming of frauds compelling banks to be more vigilant & curtail their risk appetite; (iii) turning interest rate tables & volatile bond yield movement; (iv) complex developments in resolution of cases under the National Company Law Tribunal (NCLT); and (v) RBI’s leeway of amortising hits or lowering coverage on NCLT cases providing a breather. In light of the above, we are revising down earnings estimates of corporate-focused banks by25-30% for FY18 and 10-12% for FY19, largely due to upfronting of stress recognition and treasury hit (FY20 earnings are broadly stable). However, core operating profit growth remains consistent. As the VUCA phase will weigh on valuations of corporate-focused banks, we cut valuation multiple across corporate lenders by 10-20% and, consequently, revise down TPs in similar range. Prefer HDFC Bank and Yes Bank.
Q4FY18: Corporate-focused banks to clock muted performance
• We expect corporate-focused banks to post muted performance for the quarter led by high credit cost and slower revenue momentum. Impact of RBI’s asset classification norms/pending divergence report will be a key monitorable. Earnings of retail-focused private banks are expected to be stable.
• Non Banking Financial Companies (NBFCs) are set to sustain growth momentum and improve their asset quality (more of a seasonality phenomenon). Unwinding of funding cost benefits will begin to crystalise this quarter, albeit partially. Vehicle financiers are likely to gain strong traction (particularly, tractor and commercial vehicle (CV) financing).
Cutting book value multiple and target price for corporate lenders We cut earnings of corporate lenders by 25-30% on account of upfronting of stress, turning interest tables, lower growth appetite of banks and uncertainty surrounding fraud. As current VUCA phase is envisaged to weigh on valuations of corporate-focused banks, we cut target multiple by 10-20%. We like banks with robust intrinsic franchise and stable retail & non-banking platforms. Hence, we prefer HDFC Bank (BUY, TP-2,454), Yes Bank (BUY, TP-451) and niche players like Shriram Transport (BUY, TP – 1,814).