2. BFSI Picks
2011
Banking Sector – A Quick Flashback CY2010
CY 2010 saw a lot of activities in the Indian banking sector. First of all, the Reserve Bank of India set up a
working group to look into the issue of deregulation of savings bank interest rate. It is still on the discussion
board only, however if implemented, it would encourage more savings. Secondly, Basel Committee agreed on
tougher minimum capital requirement. Positive as it looks however the new standards also included significant
reforms on liquidity and funding rules. This may depress profitability and returns for those who relied heavily on
trading or non fee income. BCBS had recommended the minimum core Tier-1 capital requirement of at least 4.5%
non-fee Tier 1
until 2015. An additional 2.5% capital conservation is expected to be in place by 2019. Increase of core tier 1
capital is a big positive as it will increase the loss absorbing capacity of banks. The government on 23rd
September’10, raised FII investment limit in the debt market to USD30 Bn (INR136,712 crore) from USD20 Bn
(
(INR91,141 crore) and slashed its borrowing plan by INR100 Bn in H2’11. We see this as an early stage of
, ) g p y y g
development of India’s debt market.
10%
9%
INR Crore 1990-91 2007-08 2008-09 2009-10 H1'2010-11
8%
7% Aggregate Deposits 1,92,541 31,96,939 38,34,110 44,92,826 49,55,150
6%
5%
Bank Credit 1,16,301 23,61,914 27,75,549 32,44,788 35,23,428
4%
3%
2% Investment in Govt. Securities 49,998 9,58,661 11,55,786 13,78,395 14,48,370
Source: RBI, Microsec Research
CRR Repo Rate Reverse Repo
3. BFSI Picks
2011
Quick Flash back contd…
Performance wise, the whole banking sector got benefited from the low interest regime in most of the part of
CY2010.
CY2010 Performance parameters d ring the one ear period sho ed that the banking sector e hibited
during one-year showed exhibited
remarkable resilience in withstanding the impact of global economic crisis. Increase in net NPAs or fall in return
on assets during the period was marginal whereas the cost of funds registered a significant decline. This had
impacted the net interest margins positively. However, during the last 2 months of 2010, Liquidity in the banking
system had dried up However RBI had been proactively managing the systemic liquidity by relaxing the reserve
up. However,
requirements (SLR) and conducting OMO purchase which saw 10-year benchmark yields cooling down a bit from
a two year highs of 8.16%. The incremental Credit deposit ratio in the banking systems had increased from 70%
in early 2010 to 132% recently. This along with higher advance tax payment put more pressure on liquidity. To
mitigate the supply side constrains most of the larger banks in India have hiked their deposit rates by 25 175 bps
constrains, 25-175
spread across different maturities in the last two months.
Banking Sector – Outlook 2011
The outlook for the banking sector in CY 2011 appears positive on the back of expected growth in credit and
business earnings in the coming quarters as the busy seasons start. However the main risk to our optimism
remains the inflation which may force RBI to continue with its interest rate tightening cycle. In that case, it
would affect the domestic credit demand negatively.
On the positive side, we are still bullish on the future prospect of the banking sector for long run. We
believe, banks would benefit in a rising GDP growth scenario. We are anticipating a credit growth of 18% for
CY2011 with more focus on large ticket infra loans and small ticket SME loans. Deposit growth which had been a
laggard till now, may see some revival going forward due to recent deposit hikes. We are anticipating a CD ratio of
80% for CY2011.
4. BFSI Picks
2011
Banking Sector – Outlook 2011 contd….
Net interest margin is likely to be under pressure in near term. We expect margins across the board to be lower by
10 15
10-15 bps due to a steep rise in short term interest rates The impending pension liability may become a near term
rates.
overhang on the whole PSU bank lot. On the asset quality front, the rising interest rate may pose upside risk to the
whole sector.
In the last 3 months Bankex corrected 22 2% on apprehensions of the above mentioned reasons However we
months, 22.2% reasons. However,
believe most of the concerns are mostly priced in and valuation looks quite compelling for long term investment.
Top Picks
Private banks
HDFC Bank
Axis Bank
Public banks
IOB
IDBI
NBFCs
REC
LIC HF
Source: ACE
5. BFSI Picks
2011
Top Picks contd….
Private Banks
HDFC Bank (Mcap – INR 938450 Mn, TTM P/E – 25.72, TTM P/BV – 3.75)
Investment highlights
One of the best CASA base of 52% which would cushion the NIMs in a increasing rate cycle.
NIMs are highest in the industry at 4.3%.
With CD ratio at 75%, the bank has headroom for higher credit growth in coming months.
Asset quality very strong with NNPA% stood at 0.2% at the end of Q3 11.
0 2% Q3’11
Provision coverage is also very healthy at 81.4%.
Axis Bank ( Mcap – INR 478101 Mn, TTM P/E – 15.3, TTM P/BV – 2.6)
Investment highlights
Strong CASA at 47%.
NIMs are also strong at 3 4%
3.4%.
With CD ratio at 73.5%, the bank has head room for strong credit growth.
The merger between Axis Bank and Enam may bridge the gap of Axis bank with other similar size peer banks in the area of IB & broking
business (SBI through SBI CAP, ICICI bank through ICICI securities, HDFC bank through HDFC securities etc), it seems a value buy for Axis
g g g y
bank. Even we believe the long term synergy of the merged entity is going to benefit Axis bank only.
Asset quality & PCR are also quite healthy with NNPA% stood at 0.3% and PCR stood at 74%.
6. BFSI Picks
2011
Top Picks contd….
Public Banks
IOB (M
(Mcap – INR 64232 Mn, TTM P/E – 8 4 TTM P/BV – 1 05)
M 8.4, 1.05)
Investment highlights
New management with CMD Mr. M Narendra is focusing more on the banks core strength.
g g g
CASA & NIMs stood at 31% & 3.3% respectively.
With CD ratio at 80%, the bank may go slow on loan disbursements in Q4’11 and focus more on quality of loans.
Pressure on asset quality is receding now. NNPA stood at 1.51% V/S 2.04% (QoQ) and 2.17% (YoY). During this quarter, the bank recovered
INR 77 Crs from written off accounts, which has boosted the bank’s bottomline.
The bank is planning to raise $1 Bn (INR 4500 Crs) through a 5 year bond issue in the overseas market. The bank has asked govt for INR 1400
QIP issue. The bank is also planning for floating its IT subsidiary which will unlock value.
IDBI Bank ( Mcap – INR 126512 Mn, TTM P/E – 8.7, TTM P/BV – 1.02)
Investment highlights
Restructuring of the asset profile to improve fundamentals. Loan growth in future may moderate a bit, however profitability is expected to
improve.
With more focus on augmenting retail base (adding over 300 branches in next 12 to 18 months), rolling off term deposits , we expect CASA to
grow at a CAGR of 31.2% over FY10-13. Currently CASA & NIMs stood at 15% & 1.9%.
Asset quality can put up some negative surprises in near term. However, we feel the pressure will peak out in FY11.
7. BFSI Picks
2011
Top Picks contd….
NBFCs
REC (M
(Mcap – INR 234225 Mn, TTM P/E – 9 6 TTM P/BV – 1 8)
M 9.6, 1.8)
Investment highlights
REC is set to benefit from strong credit demand after its diversification into financing generation projects and recent focus on the private
g gg p j p
sector. REC’s focus on the entire value chain i.e. generation to transmission and distribution is expected to augur well in future. We are expecting
a loan book growth of 23% CAGR over FY10-13E.
Strong liability profile along with the IFC status expected to sustain the spreads. NIMs stood at 4.3%.
REC has ~85% of exposure to state electricity boards out of which ~20% of the projects are guaranteed by the state government. REC has ~70%
of loans are backed by an escrow mechanism. This shows in its GNPA% which stood at 0.03% at the end of Q3’11
LICHFL ( Mcap – INR 79601 Mn, TTM P/E – 9.1, TTM P/BV – 1.97)
Investment highlights
LICHFL is one of the best bet to play the domestic housing demand. With the gap between supply & demand increasing in India, the loan
disbursements to remain strong for many more quarters going forward.
NIMs stood at 3%.
Asset quality continued its improving trend with NNPAs at 0.11%. Pending NHB clarification regarding provisioning on Standard Assets
(Teaser/Special rates), LICHF has made full provisions of INR 3.35 Bn (INR 2.35 Bn through P&L and balance through ad-hoc provisions held in
balance sheet)
sheet).
