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MOSL: FINANCIALS - BANK 4QFY18 Preview-Higher provisioning to remain a drag on earnings

FINANCIALS - BANK 4QFY18 Preview: Higher provisioning to remain a drag on earnings

 

• The key factors expected to impact earnings for the quarter are: (a) tepid corporate loan growth, (b) rising bond yields impacting treasury income, (c) progress on stressed asset resolution under Insolvency and Bankruptcy Code (IBC), (d) stressed asset recognition / provisioning as per RBI’s revised asset quality framework, and, (e) incremental provisioning required for frauds uncovered at many banks. Cost of funds is expected to start increasing hereon for many banks, with deposit rates hardening. We expect trading gains to remain minimal, given increase in bond yields even though the revised government borrowing program has provided some comfort to bond yields.
• On a sequential basis, we expect profit growth to remain muted for state-owned banks, with elevated provisions towards NCLT exposures and fraud accounts in many banks. Even as bond yields have increased post 3QFY18 levels, MTM provisioning impact is expected to be softer during 4Q, with RBI allowing banks to spread their losses over four quarters. We expect incremental stress addition for corporate banks to remain elevated, with high credit costs weighing down on profitability. Mid-sized private banks would continue to outshine peers due to continued market share gains (loan growth of 4-5x system), stable asset quality, and stable-to-improving margins (sharp fall in bulk deposits). We expect PAT growth of ~25% YoY for IIB, YES and KMB, and over 40% YoY for RBL.
• We remain upbeat on the value migration from state-owned banks to private sector banks. Within private sector banks, emerging private banks are likely to be the major beneficiaries. Within state-owned banks, we like SBIN and BOB. Among private sector banks, our key picks are HDFCB, IIB, ICICIBC and RBL.