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Financials Q1FY19 result preview: A relief for corporate banks but don’t get carried away

Key sector highlights for the quarter: 1) YoY loan growth for banks picked up to 13% from 11% though sequentially growth was flat. With low capex, we believe credit growth will taper off in 3Q19 as the low base effect of demonetization/GST wears off.  With deposit growth at 7.6% yoy lagging credit growth, the CD ratio has moved up sequentially to 76% from 75%. Bond yields have risen sharply by 50bps qoq and 139bps yoy to 7.9% resulting in MTM losses for banks which RBI has allowed them to amortize over 4 quarters. Growth in CVs remains strong and housing growth has stabilized post RERA with the Tier II/III cities being the key growth drivers. While corporate delinquencies will come down on a very high base, delinquencies in small ticket housing loans and developer loans have picked up.  Delinquencies in vehicle financing are under control despite rising fuel costs due to higher freight movement.

Expectation for retail banks – strong business growth as usual: Retail banks will continue to deliver strong loan and earnings growth like in the past with earnings growth of 25% yoy for HDBK and 27% yoy for Kotak driven by strong loan growth and a small compression in margins.

Strong recovery from Bhushan and ElectroSteel will lead to higher NIMs, lower NPLs for corporate banks : Banks have recovered more than what they have provided for in Bhushan Steel. That is the case for most banks even for ElectroSteel. Both these recoveries will lead to low or negative net slippages for corporate banks. Also most banks have a policy of allocating the excess recovery to interest first and then provisions. This will lead to an increase in NIMs for corporate banks as they appropriate the recovered amount to unbooked interest.

Expectations for private corporate banks: We are building in lower-than-consensus slippage for AXIS. Our slippage is Rs45bn versus consensus of Rs70bn. We expect GNPAs to decline 3% qoq. We expect NIMs to expand 10 bps qoq led by recoveries. We expect PAT of Rs4.2bn versus loss in 4Q18 and PAT of Rs13bn in 1Q18. We are building in slippage of Rs70bn for ICBK which is higher than the run-rate in 9M18 as we expect some out-of-the-watch list slippage. We expect loans to grow 1% qoq/12% yoy, GNPAs to increase  4% qoq and NIMs to remain stable qoq. We expect PAT of Rs5.5bn, lower than consensus, versus PAT of Rs10.2bn qoq and Rs20.5bn yoy. We expect YES to post another strong quarter led by strong loan growth and lower credit cost. NIMs will decline 8bps qoq while corporate fees may be lower. PAT growth will continue to be strong at 30% yoy and 7% qoq.

Expectation for state banks: State banks will post higher qoq NIMs due to the recoveries from 2 NCLT cases. We expect state banks other than SBI and BoB to take the dispensation of amortizing MTM provisions over 4 quarters. Other than SBI and BoB, we expect state banks to continue to report losses albeit lower than the previous quarter. For SBI we expect a small profit of Rs3.3bn versus loss of Rs77bn qoq. We have built in loan loss provisions of Rs110bn and MTM provisions of Rs48bn. We expect slippage of Rs110bn in 1Q, lower than the consensus estimate of Rs150bn. NIMs will improve 10bps qoq to 2.6%. We expect loans to marginally decline qoq and grow 6.7% yoy. We expect BoB to deliver profit that is higher than other state banks with lower credit cost, strong domestic loan growth and better NIMs. We expect slippage of Rs29bn versus Rs126bn qoq. We expect GNPAs to grow only marginally qoq – BoB’s exposure to Bhushan is smaller than other banks and unlike other banks, BoB may not recognize ElectroSteel recovery since the case is still under litigation though the cash has come in. We expect PAT of Rs5bn for BoB which is the highest among state banks we track. PNB, Union, BoI will likely report losses.

NBFCs will continue to show strong numbers: Despite concerns of interest rates impacting their profitability, we expect NBFCs to continue to report strong AUM and PAT growth. MMFS, SHTF,HDFC are expected to announce strong numbers.

IndAS unlikely to have a big impact on NBFCs: IndAS will complicate the result analysis for NBFCs, however it is unlikely to have a big impact on earnings going by management communication.

Recommendation: While this quarter will be much better than the previous quarter for corporate banks in terms of GNPAs, slippage and NIMs, we believe there are still  risks beyond 1Q which would make it difficult to base our stock picking just on 1Q results. Higher than expected credit cost for power NPLs where on an average banks have provided less than 30% while haircuts can be more than 70%, management changes for private corporate banks and M&A fears for state banks are key risks for corporate banks. We continue to prefer retail banks (HDBK, IIB, KMB) and NBFCs to corporate banks.