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PPoP to be driven by strong revenue growth and higher treasury gain
We expect small private banks to deliver strong 15% QoQ (8% QoQ ex-LVB) earnings growth with NII growth at 4% QoQ (4% QoQ ex-LVB). Loan growth for Kerala-based banks like FB and SIB is likely to normalise with local economy recovering from flood impact, while CUBK/KVB are estimated to deliver higher sequential growth on the back of strong credit growth recovery in Tamil Nadu. DCB to remain on track to deliver 20%+ loan growth. Broadly, the recent NBFC crisis and large number of PSU banks under PCA would help regional banks to continue market share gain in home states. Further, ~62bps fall in 10 Yr G-Sec between Sep-Dec’18 would boost PPoP for all banks on sequential basis. We also expect fresh slippages for small private banks to decline sequentially as most banks under our coverage have already recognised a) almost entire watch-list, and b) full NCLT 1 and 2 lists during FY18. However, lower coverage ratio for banks like SIB, KVB is likely to keep credit cost elevated.
* Loan growth to remain robust while temporary pricing power due to NBFC crisis would help banks to sustain high margins: We expect DCB/FB to sustain 20%+ loan growth while credit growth for banks like CUBK/KVB is likely to accelerate in Q3FY19E on the back of strong recovery in home state credit off-take. Recent NBFC crisis and large number of PSBs under PCA would also help banks gain market share in their home states. Improved pricing power due to recent NBFC crisis and increase in MCLR rates are likely to help banks sustain/improve NIMs on a sequential basis.
* Higher treasury profits to drive PPoP: Sharp ~62bps fall in 10 Yr G-Sec yields, highest in past eight quarters, is likely to help banks improve non-interest income during Q3FY19E and the same would drive PPoP higher. The share of treasury income to non-interest income fell to avg ~2% in Q2FY19, from high of avg ~7% in Q2FY18. PPoP growth for KVB/LVB to revive sharply given treasury/forex loss in Q2FY19 while absence of one-off expense related to floods (~Rs150mn for FB) would enable banks like FB/SIB to improve sequential PPoP growth.
* NBFCs: We expect credit growth for Edel/LTFH to moderate given incremental focus towards improving liquidity cushion. Further, increase in cost of borrowing for NBFCs at systemic level is likely to keep margin under pressure. Broadly, lower topline growth is likely to impact earnings growth in Q3FY19E. However, we believe CAGL (NBFC-MFI) will sustain robust growth trajectory while lower NIMs are likely to impact earnings growth trend.
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