Q2FY18 preview: Nothing disruptive is expected from results

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Published: October 16, 2017 3:14:28 AM

The savings account (SA) rate cut (Aug-17) of 50 bps should help net off some NIM pressure, but core PPOP growth is unlikely to surprise positively.

Provisioning will remain high as banks provide for NCLT cases and ICICI/SBI will likely use capital gains from subsidiary stake sales to improve their overall provision coverage, in our view.

Slippages for Corporate banks in Q1FY18 were affected by granular slippages, which we expect to normalise in Q2FY18F. Also, among large and mid-corporates, telecoms (Aircel and Rcom) should lead to some rise in slippages over the next two-three quarters, but otherwise we expect a meaningful reduction in slippage levels — we expect Q2FY18F slippages to drop by 45% for PSU banks over FY17 levels, while for Axis/ICICI, we expect slippages to drop by 15% vs. FY17. Provisioning will remain high as banks provide for NCLT cases and ICICI/SBI will likely use capital gains from subsidiary stake sales to improve their overall provision coverage, in our view. The core PPOP of corporate banks has been weak with low loan growth and NIM pressure. The savings account (SA) rate cut (Aug-17) of 50 bps should help net off some NIM pressure, but core PPOP growth is unlikely to surprise positively. (i) ICICI/Axis have set market expectations right by guiding 15-25 bps NIM drop and we expect no further negative surprises. (ii) SBI had a poor Q1FY18, but has guided for significant recovery/upgrade from granular slippages from Q2 – this trend will be the key. (iii) After the recent correction, we believe corporate banks’ expectations over asset quality and PPOP are low and hence we see value in corporate banks.

Retail banks

We expect retail banks + Yes Bank to deliver 26% y/y PPOP growth in Q2FY18F, translating into 24% y/y PAT growth. We continue to prefer HDFC Bank (Buy) and Yes Bank (Buy). Key things to watch out for: (i) HDFC Bank has guided for an acceleration in market share accretion – delivery on this will be the key. (ii) Yes Bank had guided for 20 bps of loans as exposure in Top-50 system NPAs – the delivery on this will further reinforce our positive view, (iii) IIB — Channel checks indicate stress in some diamond companies – will need to see the impact for IIB.

NBFCs and HFCs

We expect NBFCs and HFCs to deliver 19% y/y growth in PPOP and 18% y/y growth in PAT. Expect a turnaround in rural/CV financiers: We expect some growth pick-up and asset quality to normalise for Shriram Transport and Mahindra Finance from Q2FY18F. We see value in Shriram Transport (STFC IN, Buy) at current levels. HFCs have delivered well on growth in spite of RBI data indicating a slowdown in mortgage growth. We remain concerned over incremental spreads for core prime mortgages and hence have a Neutral view on HFCs. We upgraded LICHF recently to Buy.

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