1. India Financials Preview | Q4FY16F: As weak as Q3

India Financials Preview | Q4FY16F: As weak as Q3

NPA spike well known: The quantum of PPOP deterioration is what remains to be seen

By: | Published: April 11, 2016 6:01 AM

Like Q3FY16, the Reserve Bank of India’s asset quality review should continue to drive Q4FY16. Except for Bank of Baroda (BOB), we expect the slippage trend for corporate banks to maintain Q3FY16 pace but pre-provision operating profit (PPOP) deterioration to deepen due to weaker NIMs (NII to contract 4% for PSUs and grow just 11% for ICICI/Axis). FY17 guidance for slippages will be key to watch: we expect SBI’s pace of slippage to come off while ICICI Bank is likely to guide to elevated slippages due to its high infra exposure. Retail banks + Yes Bank/LIC Housing Finance/ Shriram Transport Finance (STF) are likely to surprise positively.

Litmus test to continue

Most banks had recognised ~50% of stress related to the RBI audit and hence we expect that Q4FY16 slippage levels for corporate banks will be similar to Q3FY16 (6-7% annualised). Second order impact and slippages from non-fund exposures could affect Q1FY17 as well, but we expect PSUs to guide for better FY17 vs FY16. ICICI Bank/Axis Bank possibly will guide to similar slippage flow in FY17, given ICICI Bank’s higher infra exposure and Axis bank’s low slippage base of FY16.

Asset quality to drag on PPOP performance of corporate banks: We expect NII (net interest income) to contract by ~4% for PSU banks and ICICI/Axis Bank to have just 11% NII growth vs 16-17% loan growth. Retail banks’ trend of +20% PPOP growth is likely to continue.

What to monitor: Near-term consensus earnings to be revised down
Private corporate bank
(i) ICICI – We expect FY17 slippage guidance similar to FY16, unlike peers
(ii) Axis – Could possibly spell out its total exposure to stress asset book. Unlikely to repeat
a good Q3FY16 asset quality
(iii) Yes Bank—FY17 credit cost guidance of ~70bps or below positive. We expect upward earnings revisions for Yes Bank.

PSU banks
(i) For BOB, Net interest margin (NIM) performance will be key. While non-performing assets (NPAs) look well recognised, PPOP/assets of ~1.2% is the key challenge
(ii) SBI’s guidance of similar slippage is well anticipated—FY17 guidance will be key
(iii) Punjab National Bank/ Bank of India likely to continue to disappoint.

Retail banks: Profit after tax (PAT) growth of 24% y-o-y to follow PPOP growth of 24% y-o-y. Kotak’s fee growth will be key given the miss after ING acquisition.

NBFCs: (i) Among HFCs, HDFC is likely to disappoint, with just 8% NII growth, whereas LICHF should surprise with its mortgage repayment rates coming off

(ii) For SHTF, NPAs should inch up because of CE business integration and 150-day migration, but the impact on NPAs could be lower than we initially expected. Could surprise positively.
Sector and stock view:

For ICICI/Axis, while the flow of NPA accretion should remain high for a few quarters, we believe PPOP will hold up better; hence we maintain our BUY ratings on Axis/ICICI, though upside potential after recent upward moves is merely reasonable.

SBI remains our only BUY among PSUs.

Retain BUY on all three retail banks and Yes Bank. Among NBFCs, LICHF/ SHTF preferred over MMFS/HDFC.

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