Credit costs to remain elevated at Q3 levels for PSBs, restructuring activity to be high
IN Q4, system loan growth has remained weak (9.8% in March) and we expect problem asset generation to remain elevated as the recovery remains sluggish and banks restructure loans ahead of the dispensation for restructuring expiring.
In this context, we expect PSU banks under our coverage to deliver weak (-3% to +7%) pre-provision operating profit (PPOP) growth. We expect PAT (profit after tax) to be flattish or down year-on-year)for PSUs other than SBI. SBI’s PAT should be up sharply (34% y-o-y ) as the Q4 FY14 spike seen in credit costs is unlikely to recur.
Among the large private sector banks, we expect Axis and HDFC Bank to deliver stronger PPOP and PAT growth than ICICI. Among the smaller private sector banks we expect Yes, IIB (IndusInd Bank) and Kotak to deliver 30% PAT growth. In the NBFC (non-bank financial companies) space, we expect a steady quarter for housing finance companies and a subdued quarter for vehicle finance companies.
Private banks—steady PPOP growth: We expect the private banks to report steady PPOP growth (18% y-o-y in aggregate) on account of faster loan growth than PSUs and stable NIMs (net interest margins) supported by softening wholesale rates. Among the larger banks, HDFCB (20% PAT growth) and Axis (17%), are likely to deliver a stronger balance sheet and PAT growth than ICICI (13%). Axis and ICICI are also likely to see elevated levels of problem asset generation, in our view—in Axis’s case this would represent an increase from last quarter’s levels while ICICI already experienced elevated stress last quarter. Among the smaller private banks, wholesale funded banks (Yes, IndusInd) should show a strong performance, supported by softening wholesale rates. KMB (Kotak Mahindra Bank) too could show 30% PAT growth supported by strong capital markets fees.
PSU Banks–sluggish PPOP growth,: We expect PSU banks under our coverage to deliver system-like loan growth. We expect PPOP growth to lag loan growth as opex growth, despite cost control, remains above balance sheet and revenue growth. We expect net slippages and credit costs to remain elevated at Q3 levels. For SBI, this would imply a decline in credit costs on a y-o-y basis. SBI could thus show strong PAT growth (34% y-o-y). We expect PAT growth at other PSUs under our coverage to be weak.
NBFCs—housing finance steady while transport finance subdued: Within the NBFC space, we expect housing finance companies to show sequentially higher margins and steady growth, on the back of healthy demand in the individual segment and a softening of wholesale rates.
Loan growth for vehicle finance companies should show a moderate pick-up from Q3 levels, with some signs of a CV (commercial vehicle) recovery, but PAT growth should be weak on account of elevated credit costs continuing with weakness in the rural/agri economy. IDFC could report a weak quarter q-o-q with weak loan growth and higher provisions/ opex as it transitions into a bank.
However, we believe PAT growth y-o-y is likely to be high, as Q4FY14 saw very high provisioning expenses. Overall we expect NBFC to report earnings growth of close to 11%.