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					Banking Sector - Q4FY12 Results Review




  Silky Jain - Research Analyst      Bhavya Sundesha - Research Associate
  Email: silky.jain@nirmalbang.com   Email: bhavya.sundesha@nirmalbang.com
  Tel: 022 39268178                  Tel: 022 39268022
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 g                                              Q4FY12 Results Review

Co                                              Higher interest rate and slowing growth has resulted in an increase in NPA for the sector as a whole
                                                thereby deteriorating the asset quality. We believe that the current environment continues to be

ve                                              challenging for the Indian banking sector. Weaker rupee, inactive government policy and much higher
Q 4 Res u l ts Rev i ew – 1 st J u n e 20 1 2




                                                fiscal deficit poses a risk to easing of inflation. With continuous slowdown in economy and increasing
                                                worries about asset quality overall profitability of the banks are likely to remain under pressure in the
ra                                              near term.


ge




                                                   Source: Nirmal Bang Research

                                                The overall banking result for Q4FY12 was a mixed bag. Most of the private banks emerged as clear
                                                winners owing to strong performance in asset quality, business growth and core profitability. The PSU
                                                banks continued to bear the brunt of asset quality concerns which only got aggravated with significant
                                                increase in restructuring book. Most of the PSU banks results were a disappointment barring an
                                                exception of few. On operational basis, few banks reported good results which are as follows:

                                                        ICICI Bank
                                                        City Union Bank
                                                        Yes Bank
                                                        Indusind Bank
                                                        Dena Bank
                                                        DCB
                                                        Karur Vysya Bank
                                                        Kotak
                                                        SBI

                                                We have tried to analyze the results of the banks based on the different parameters in order to conclude
                                                which stocks looks good from investment purpose. We believe that overall the macro environment is not
                                                supportive for the banking industry as a whole as of now. But once the environment improves the banks
                                                which are fundamentally stronger would be amongst the ones which will face a faster recovery as
                                                compared to the banks which are fundamentally weak. We have evaluated the banks on the following
                                                parameters:




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 g
                                                                                                                                   Restruct
Co                                                                                                 PBP     Net
                                                                                                                                    uring
                                                                                                                                   book %               adv      Dep
                                                                               NII YoY    C/I      YoY    profit   Gross   Net     of total   CASA     QoQ      QoQ
ve                                               Bank                  NIMs    growth    ratio   growth   margin   NPA     NPA       adv      ratio   growth   growth   CAR
Q 4 Res u l ts Rev i ew – 1 st J u n e 20 1 2




                                                 SBI                    3.9%   45.2%     43.4%   57.8%    11.9%    4.4%    1.82%    4.2%      46.6%    2.8%     4.3%    13.9%

ra                                               Union Bank of India
                                                 PNB
                                                                        3.3%
                                                                        3.5%
                                                                                9.3%
                                                                                9.3%
                                                                                         39.3%
                                                                                         36.0%
                                                                                                 83.9%
                                                                                                 17.1%
                                                                                                          11.9%
                                                                                                          13.0%
                                                                                                                   3.0%
                                                                                                                   2.9%
                                                                                                                           1.70%
                                                                                                                           1.52%
                                                                                                                                    6.6%
                                                                                                                                    8.5%
                                                                                                                                              31.3%
                                                                                                                                              36.2%
                                                                                                                                                      15.9%
                                                                                                                                                      11.9%
                                                                                                                                                                8.5%
                                                                                                                                                                6.5%
                                                                                                                                                                        11.9%
                                                                                                                                                                        12.6%


ge                                               Bank of India
                                                 Canara Bank
                                                                        2.9%
                                                                        2.5%
                                                                                8.4%
                                                                                3.4%
                                                                                         41.9%
                                                                                         46.9%
                                                                                                 67.1%
                                                                                                 -12.0%
                                                                                                          10.9%
                                                                                                           9.2%
                                                                                                                   2.3%
                                                                                                                   1.7%
                                                                                                                           1.47%
                                                                                                                           1.46%
                                                                                                                                    7.0%
                                                                                                                                    3.4%
                                                                                                                                              34.3%
                                                                                                                                              25.2%
                                                                                                                                                       7.9%
                                                                                                                                                       6.0%
                                                                                                                                                                3.6%
                                                                                                                                                                3.7%
                                                                                                                                                                        12.0%
                                                                                                                                                                        13.8%

                                                 Bank of Baroda         3.0%    7.0%     44.5%    5.4%    16.8%    1.5%    0.54%    5.3%      33.2%   10.2%    10.2%    14.7%

                                                 Central Bank           2.6%   -11.5%    63.9%   85.1%    -2.0%    4.8%    3.09%    11.5%     33.3%   13.1%     4.2%    12.4%

                                                 Corporation bank       2.4%    9.5%     35.2%    9.1%     8.8%    0.9%    1.26%    4.6%      22.2%    8.8%     7.5%    13.0%

                                                 IOB                    2.7%   10.3%     45.7%    2.6%     9.8%    2.7%    1.35%    8.8%      26.4%    8.1%     6.8%    13.3%

                                                 United                 3.0%    7.7%     44.2%   12.4%     6.3%    3.4%    1.72%    4.9%      40.8%    8.1%     7.6%    12.7%

                                                 Andhra bank            3.3%    6.1%     42.2%   -6.7%    10.5%    2.1%    0.91%    7.2%      26.4%    7.0%     7.3%    13.2%

                                                 Indian Bank            3.2%    -2.6%    42.6%   -11.7%    9.9%    2.0%    1.33%    9.8%      31.5%    3.6%     1.5%    13.5%

                                                 OBC                    2.7%    5.4%     46.6%   39.9%     5.8%    3.2%    2.21%    8.4%      24.0%    2.1%    -0.1%    12.7%

                                                 Dena                   3.2%   27.0%     41.2%   38.6%    11.8%    1.7%    1.01%    6.0%      34.5%   19.3%     12.9%   11.5%

                                                 UCO bank               2.7%   24.4%     44.1%   25.6%     6.0%    3.5%    1.96%    6.3%      23.9%   10.9%     7.6%    12.4%

                                                 Allahabad bank         3.2%   11.9%     45.2%   15.5%     8.8%    1.8%    0.98%    5.7%      30.8%   10.4%     9.8%    12.8%

                                                 Axis Bank              3.6%   26.2%     45.4%   11.9%    16.7%    1.1%    0.25%    1.8%      42.0%   14.1%     5.5%    13.7%

                                                 ICICI                  3.3%   23.7%     41.7%   35.0%    16.7%    3.8%    0.62%    1.7%      43.5%    3.1%    -2.0%    18.5%

                                                 HDFC bank              4.2%   19.3%     49.8%   15.1%    16.4%    1.0%    0.18%    0.4%      48.4%    1.3%     6.1%    16.5%

                                                 Kotak                  4.8%   10.6%     75.4%    6.9%    12.1%    1.2%    0.57%    0.1%      32.0%   -1.7%     6.4%    17.5%

                                                 Indusind               3.3%   19.7%     49.9%   27.2%    12.6%    1.0%    0.27%    0.3%      27.3%    8.1%     4.4%    13.9%

                                                 Yes bank               2.8%   28.6%     39.9%   23.4%    13.2%    0.2%    0.05%    0.5%      15.0%    5.9%     4.7%    17.9%

                                                 SIB                    3.1%   28.4%     55.6%    6.4%    11.3%    1.0%    0.28%    3.7%      19.7%   10.3%     7.9%    14.0%

                                                 CUB                    3.4%   14.7%     42.3%   17.3%    13.4%    1.0%    0.44%    0.2%      18.2%   10.8%     6.0%    12.6%

                                                 Federal bank           3.6%    9.6%     42.9%    6.2%    14.5%    3.4%    0.53%    6.4%      27.4%   10.1%     4.7%    16.6%

                                                 Ing Vysya              3.3%   18.9%     57.3%   53.9%    10.1%    1.9%    0.18%    1.4%      34.2%    9.3%    11.2%    14.0%

                                                 DCB                    3.1%   13.5%     72.5%    8.2%     7.7%    4.4%    0.60%    0.1%      32.1%   22.7%     2.3%    15.4%

                                                 IDBI                   2.1%    9.2%     39.9%    2.4%    11.2%    2.5%    1.61%    5.5%      24.1%   16.0%    18.8%    14.6%
                                                Source: Company data, Nirmal Bang Research




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                                                Net Interest Margins: Seasonal Impact
 g                                              Most of the banks saw lower NIMs on QoQ basis as the banks had to meet up its target of meeting
                                                priority sector lending norms which led to decline in NIMs. The banks which were highly dependent on
                                                borrowing got hurt by higher cost of funds resulting from higher interest rate in the year end. Moreover,
Co                                              many of the PSU banks have reported interest income reversal which also led to decline in NIMs on
                                                sequential basis.

ve                                              On sequentially basis Bank of India reported increase in NIM. However, Allahabad Bank, OBC, PNB
Q 4 Res u l ts Rev i ew – 1 st J u n e 20 1 2




                                                reported significant decline in NIMs on QoQ basis. Interest income reversal during the quarter led to the
                                                sequential drop in NII.
ra                                              Amongst the private sector Axis Bank, DCB, Federal Bank, ING reported QoQ decline in NIMs. ICICI Bank
                                                and City Union Bank reported improvement in NIMs on sequential basis. On YoY basis too ICICI bank and
ge                                              Axis Bank reported marginal increase in NIMs.
                                                Going forward, we believe that the pressure on NIMs will continue to remain at least in Q1FY12. Most of
                                                the banks have reduced their Base rate and BPLR which is expected to impact the margins of the banks
                                                going forward. Moreover, increasing proportion of high cost deposits (bulk) will also impact the margins
                                                in near term. However, there can be some respite in the margins resulting from the benefit arising from
                                                the reduction in CRR.

                                                Loan growth: Year End Syndrome
                                                Demand for working capital continued to drive loan book growth for most of the banks. Almost all the
                                                                                                                                                 st
                                                banks reported good loan growth in Q4FY12. Overall industry advances grew 17% YoY as on 31 March
                                                2012 with most of the growth coming in the last fortnight of the year (2.8% on Fortnight basis).
                                                Indusind Bank, DCB, South Indian Bank, HDFC Bank, Dena Bank, City Union Bank, Bank of Baroda,
                                                Kotak reported above industry growth in FY12. However, Canara Bank, OBC, Bank Of India reported YoY
                                                growth below industry average.
                                                Loan book increased sequentially for almost all banks. However, some banks like Indian Bank (3.6%),
                                                ICICI (3.1%), OBC (2.1%), HDFC Bank (1.3%) and Kotak (-1.7%) reported minimal growth on sequential
                                                basis. Banks like DCB (22.7%), Dena (19.3%), UBI (15.9%), Axis (14.1%), PNB (11.9%), Allahabad Bank
                                                (10.4%) and BoB (10.2%) reported good growth sequentially (double digit). Growth in deposits remained
                                                subdued for the entire banking industry.

                                                CASA growth: Players with high savings rate gains
                                                Aggregate CASA grew at lower pace for most of the banks due to rising differential between savings and
                                                term deposit rates. Further the term deposit growth continued to outpace the growth in overall deposits
                                                adding pressure to the CASA ratio.
                                                Private Banks like YES Bank, Kotak and Indusind Bank were the only bank which witnessed a sharp
                                                improvement in CASA growth (55.6%, 41.1% and 23.9% on YoY basis respectively).

                                                Cost to income ratio: Higher employee expenses dents opex
                                                Sequentially most of the banks saw C/I ratio deteriorating, majorly due to hit of one-off provision of
                                                pension and gratuity liability. As the actual liabilities came more than the provisions made by the bank
                                                the banks witnessed a sharp increase in the employee cost. However, PNB, SBI, UBI, DCB, IOB,
                                                Corporation Bank and IDBI reported improvement in C/I ratio on QoQ basis.




                                                                                                                                                        3|Page
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 g                                              Asset Quality: No signs of bottoming out
                                                Deterioration in asset quality continued during Q4FY12 for most of the PSU banks owing to higher
                                                slippages and SEB and Air India restructuring. However higher recovery and up-gradation were the saving
Co                                              grace for the banks.

                                                Gross NPA figures increased for most of the PSU Banks sequentially. However, SBI, Andhra Bank and BOI
ve
Q 4 Res u l ts Rev i ew – 1 st J u n e 20 1 2




                                                reported decline in Gross NPA sequentially. Private Banks fared better than the PSU Banks with most of
                                                them reporting a decline in Gross NPA, major among them being Axis Bank, DCB, HDFC, ICICI and Karur

ra                                              Vysya Bank. IndusInd and Corporation Bank reported marginal increase in Gross NPAs as compared to
                                                significant increase witnessed by most of the peers.

ge                                              Provision Coverage Ratio: Cushion against deteriorating asset quality
                                                Most of the private banks have been maintaining high Provision Coverage Ratio (above 80%) which
                                                indicates that these banks are well cushioned against the deteriorating asset quality. Higher slippages and
                                                poor credit underwriting compared to private banks led to higher NPA provisions being made by majority
                                                of the PSU Banks. Apart from SBI & UBI almost all PSU Banks reported significant increase in NPA
                                                provision. SBI and BOI improved their PCR on a sequential basis while PNB & Allahabad bank reported
                                                decline in PCR on sequential basis.

                                                Restructured Book: No End seen in near term
                                                Along with the NPAs, the restructured loan book of the banks have also increased and rather to a greater
                                                extent. The proportion of restructured loans as compared to total advances is significantly high in case of
                                                PSU Banks with the worst among them being Central bank of India, Indian Bank, IOB, PNB, OBC, Andhra
                                                Bank, UCO bank. As compared to other PSU banks Dena Bank, Bank of Baroda, SBI and Allahabad bank
                                                have comparatively lower proportion of restructured book. Amongst the Private Banks, Federal Bank and
                                                ICICI Bank have high proportion of restructured loans.

                                                However, there are few banks which have been maintaining a healthy asset quality with minimal
                                                restructured book. The banks performing well in terms of restructured book are Kotak, DCB, City Union
                                                Bank, IndusInd, HDFC and Yes Bank (all being Private banks).

                                                While majority of the banks have claimed that the bulk of restructuring has been done, some banks have
                                                agreed that the restructuring is yet to be completed. Amongst the banks which have given some guidance
                                                on expected restructuring the following banks have the maximum restructuring yet to be done:

                                                Canara Bank: ~5000 crs to SEB and ~1000 crs to other corporate accounts
                                                Allahabad Bank ~ 2500 crs to SEB and other corporate accounts
                                                Union Bank ~1500 crs to SEB and other corporate accounts

                                                Management of Federal Bank does not expect any major restructuring except some normal accounts
                                                which may come up for restructuring.

                                                Though the NPAs have increased significantly during FY12, the asset quality woes have not ended here.
                                                We believe that the asset quality of the banks will continue to remain under pressure in the near to
                                                medium term resulting from:
                                                        Slowdown in the economy
                                                        Depreciating rupee




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 g                                                       Moreover, with more and more corporates filing for restructuring, the restructured loan book continues
                                                         to remain under pressure with an increasing trend. It has been seen that on an average basis maximum
                                                         10% of the restructured book tend to fall to NPA. Thus, we have adjusted the banks current book value
Co                                                       for 10% of outstanding restructured book for greater transparency and have reworked the Adj. BV and
                                                         consequently Adj. P/BV. Following are the resultant figures :

ve
Q 4 Res u l ts Rev i ew – 1 st J u n e 20 1 2




                                                                                               ABV                           Restructu
ra                                                                                             (For
                                                                                               Net     Adj.
                                                                                                                  O/S
                                                                                                              Restructured
                                                                                                                             red book
                                                                                                                             % of total
                                                                                                                                            10% of
                                                                                                                                          Restructur    ABV        P/ABV
                                                Bank                       CMP       P/E      NPA)    P/BV        Amt        advances      ed book     post adj   post adj    ROE
ge                                              SBI
                                                Union Bank of India
                                                                          2,056
                                                                            202
                                                                                      8.5
                                                                                     4.3
                                                                                              1,015
                                                                                               152
                                                                                                       2.02
                                                                                                       1.32
                                                                                                                 37,168
                                                                                                                 11,880
                                                                                                                               4.2%
                                                                                                                               6.6%
                                                                                                                                             3,717
                                                                                                                                             1,188
                                                                                                                                                         960
                                                                                                                                                         143
                                                                                                                                                                     2.14
                                                                                                                                                                     1.41
                                                                                                                                                                             19.3%
                                                                                                                                                                             23.6%
                                                PNB                         756      4.5       646     1.17      25,000        8.5%          2,500       572         1.32    21.6%
                                                Bank of India               341      5.1       253     1.34      17,670        7.0%          1,767       223         1.53    20.9%
                                                Canara Bank                 403       5.4      389     1.04      7,896         3.4%           790        371         1.09    16.1%
                                                Bank of Baroda              687       4.7      601     1.14      15,200        5.3%          1,520       564         1.22    23.1%
                                                Central Bank of India*       76      10.6       15     5.22      17,347       11.5%          1,735        -9        -8.56    -7.5%
                                                Corporation bank            418      4.4       500     0.84      4,670         4.6%           467        468         0.89    17.0%
                                                IOB                          81      3.1       111     0.73      12,641        8.8%          1,264        96         0.85    19.6%
                                                United                       60       4.1       87     0.69      3,106         4.9%           311         78         0.77    14.2%
                                                Andhra bank                 109      4.5       120     0.91      6,081         7.2%           608        109         1.00    18.2%
                                                Indian Bank                 169      5.3       187     0.90      8,902         9.8%           890        166         1.02    15.0%
                                                OBC                         229      6.3       305     0.75      9,510         8.4%           951        272         0.84     9.3%
                                                Dena                         92      3.1       106     0.86      3,410         6.0%           341         97         0.95    23.7%
                                                UCO bank                     69      4.6        61     1.14      7,370         6.3%           737         50         1.40    16.1%
                                                Allahabad bank              131       4.1      171     0.77      6,353         5.7%           635        158         0.83    16.6%
                                                Axis Bank                   972       7.8      541     1.79      3,060         1.8%           306        534         1.82    22.4%
                                                ICICI                       784      11.9      508     1.54      4,256         1.7%           426        504         1.56    12.6%
                                                HDFC bank                   506      20.4      129     3.93       788          0.4%            79        128         3.94    19.0%
                                                Kotak                       562      19.7      170     3.30        30          0.1%             3        170         3.30    16.4%
                                                Indusind                    299      15.6       95     3.15        91          0.3%             9         94         3.16    19.8%
                                                Yes bank                    330      10.7      132     2.49       201          0.5%            20        132         2.50    23.3%
                                                SIB                          24       5.6       17     1.41      1,021         3.7%           102         16         1.48    24.1%
                                                City Union Bank              46      6.5        30     1.52        27          0.2%             3         30         1.53    22.4%
                                                Federal bank                419      7.5       322     1.30      2,398         6.4%           240        308         1.36    16.7%
                                                Ing Vysya                   325      9.6       255     1.28       409          1.4%            41        252         1.29    13.1%
                                                DCB                          38      13.7       32     1.20         4          0.1%             0         32         1.20     8.6%
                                                IDBI                         85       3.5      120     0.71      10,037        5.5%          1,004       113         0.76    16.8%
                                                * For Central Bank, P/E has been calculated based on annual EPS
                                                Source: Company Data, Nirmal Bang Research

                                                         Based on our above calculations we can infer that the stocks having higher % of restructured book and
                                                         which are trading on a higher P/ABV after adjusting for slippages from restructured book which we have
                                                         highlighted in red will continue to “face some pressure in near term”.




                                                                                                                                                                       5|Page
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 g                                                           Going forward: Pain not Yet Over
                                                             While bank’s have been hurt by restructuring bulk of the stressed assets we believe near term scope for
                                                             improvement is very less. The banking sector on a whole continues to be haunted with lots of problems
Co                                                           and no immediate solution is being seen which can provide a respite in the near term. Moreover, the
                                                             announcement of certain regulations and discussion papers (Basel III, priority sector, dynamic
                                                             provisioning etc) has increased challenges for banks which will impact the earnings in the medium term.
ve
Q 4 Res u l ts Rev i ew – 1 st J u n e 20 1 2




                                                             However, based on our overall study of the various parameters and the revised valuations we can
                                                             conclude that there are some stocks which have shown some resilience to the current macro-economic
ra                                                           scenario; though not completely restrained from it.
                                                             We believe issues related to asset quality will continue to remain over-hang for next couple of quarters
ge                                                           coupled with slowing credit demand and decline in margin will be the key parameters to watch out for in
                                                             near term. We believe that in such a scenario the stocks which have shown consistent performance over
                                                             the last few quarters on most of the parameters and are attractively valued (post adjustment of
                                                             estimated slippages) should be selected.
                                                             Based on our revised valuations we believe that these stocks can be accumulated on decline as these
                                                             stocks will perform once the macro environment improves as compared to the banks which have been
                                                             grappled with their own fundamental problems.

                                                             Stock Picks

                                                                                                       Adj.      P/ABV for Est.    Div. Yield   Price change since
                                                 Bank                             CMP        P/E       P/BV        slippage        Ratio(%)            result          RoE (%)
                                                 ICICI                            836        11.9       1.54         1.56            2.1%              -8%              12.6%
                                                 Axis Bank                       1,027       7.8        1.79         1.82            1.6%             -12%              22.4%
                                                 Yes bank                         338        10.7       2.49         2.50            1.2%             -11%              23.3%
                                                 Indusind                         310        15.6       3.15         3.16            0.7%             -14%              19.8%
                                                 Federal bank                     423        7.5        1.30         1.36            2.1%              9%               16.7%
                                                 Ing Vysya                        340        9.6        1.28         1.29            1.2%             -13%              13.1%
                                                 City Union Bank                   48        6.5        1.52         1.53            2.2%              0%               22.4%
                                                 DCB                               40        13.7       1.20         1.20            0.0%             -20%              8.6%
                                                 Dena                              89        3.1        0.86         0.95            3.3%              2%               23.7%
                                                 Allahabad bank                   131        4.1        0.77         0.83            4.6%             -23%              16.6%
                                                 Corporation bank                 416        4.4        0.84         0.89            4.9%              9%               17.0%
                                                Source: Company Data, Nirmal Bang Research




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 g
Co
ve
Q 4 Res u l ts Rev i ew – 1 st J u n e 20 1 2




ra
ge




                                                Disclaimer:

                                                This Document has been prepared by Nirmal Bang Research (A Division of Nirmal Bang Securities PVT LTD). The information, analysis and
                                                estimates contained herein are based on Nirmal Bang Research assessment and have been obtained from sources believed to be reliable. This
                                                document is meant for the use of the intended recipient only. This document, at best, represents Nirmal Bang Research opinion and is meant for
                                                general information only. Nirmal Bang Research, its directors, officers or employees shall not in anyway be responsible for the contents stated
                                                herein. Nirmal Bang Research expressly disclaims any and all liabilities that may arise from information, errors or omissions in this connection. This
                                                document is not to be considered as an offer to sell or a solicitation to buy any securities. Nirmal Bang Research, its affiliates and their employees
                                                may from time to time hold positions in securities referred to herein. Nirmal Bang Research or its affiliates may from time to time solicit from or
                                                perform investment banking or other services for any company mentioned in this document.




                                                                               Nirmal Bang Research (Division of Nirmal Bang Securities Pvt. Ltd.)

                                                                                                     B-2, 301/302, Marathon Innova,
                                                                                                      Opp. Peninsula Corporate Park
                                                                                                       Off. Ganpatrao Kadam Marg
                                                                                                    Lower Parel (W), Mumbai-400013
                                                                                                    Board No. : 91 22 3926 8000/8001
                                                                                                           Fax. : 022 3926 8010




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