Published on 14/02/2018 5:51:22 PM | Source: Kotak Securities Ltd

Banking Sector - No respite in business for banks; NBFCs in sweet spot - Kotak Sec

Posted in Broking Firm Views - Sector Report| #Kotak Securities Ltd #Banking Sector #Sector Report

No respite in business for banks; NBFCs in sweet spot. On a consolidated basis, banks reported a loss despite recovery in loan growth as provisions for investments and credit costs remained high. Slippages picked up led by RBI’s financial inspection but recovery trends were weaker-than-expected. We see near term triggers on the back of resolution of large corporate impaired loans. NBFCs reported strong results on the back of improving macro, lower borrowings cost and end of the NPL transition period.

Bank earnings shrink sharply

Banks reported an earnings decline of ~60% yoy on the back of high NPL and investment provisions. Revenue growth was modest ~4% due to lower treasury gains, even as NII grew by ~14%. Loan growth trends continue to improve especially for PSU banks, with clear trends of shifting the loan mix towards retail and MSME. Margins continue to decline for most banks as continued slippages as well as competition put pressure on yields. Operating expense growth remains under control with 6% yoy growth in expenses; PSU banks have started to provide to wage revision, full impact of which will reflect from 4QFY18 onwards.

Looking for resolutions to drive near-term performance; recapitalization theme underway

Of the two themes that we discussed in the previous review, we note that the recapitalization is closer to completion. Most public banks, which saw a spike post announcement, has retraced back to pre-announced levels or is marginally higher suggesting limited impact of the recapitalization, which is a bit surprising. Our thesis was to play this theme through large corporate banks as compared to mid-tier names as the risk of book value dilution is quite high and this has accentuated further if dilution is at current market prices. However, the key theme on corporate recovery remains broadly intact though RBI’s recent move to remove other dispensations for resolutions pushes the RoE argument a bit further. It has a lower fair value impact on our book value as it is adjusted for net NPLs. Higher coverage and larger share of NCLT referrals that should see announcements to drive stock price performance, in our view.

Fresh slippages spike; stressed loans stable qoq

Headline impaired loans were stable qoq at 10.1% with gross NPLs increasing 30 bps qoq to 8.8% while restructured loans declined 40 bps to 1.3%. Impaired loans of public banks increased ~10 bps to 13.2% (gross NPLs increased 60 bps qoq to 11.5%) while that of private banks was stable qoq at 5.0% of loans. Gross NPL increased 7% qoq on absolute basis.Fresh slippages increased to ~6% on account of large slippages for SBI and BoI, whereas Axis Bank and ICICI Bank reported decline in slippages. Incrementally, large share of slippages will likely result from a defined pool of unrecognized stressed loans.

NBFCs: Let the good times roll

Improving loan growth, peaking out of credit costs, lower borrowing cost and low base of demonetization in general has led to strong performance of NBFCs. A positive outlook on growth for commercial vehicles and rural autos has been a key driver. The impact of demonetization, initial glitches due to transition to GST and transition to 90 dpd NPL norms- all three headwinds are broadly behind the sector leading to a more positive near-term view on the business. Impetus on Government spending in infra and rural sector provide a boost. However, rising interest rates and medium-term increase in competition are key risks.

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