>INDIAN FINANCIAL SERVICES (MORGAN STANLEY)

F2Q10 Earnings Preview – A Sedate Quarter Ahead

Quick Comment: F2Q10 results for Indian banks will kick off on October 12 with Axis Bank. In this note, we discuss our earning estimates for these banks. We believe that earnings growth for Indian banks will be fairly sedate in 2Q – on a QoQ basis – likely driven by the following:

• Limited volume growth – Loan growth remained weak during the quarter. There was some pickup towards the end of the quarter (in line with our view that growth will pick up from F3Q10 onwards.

• NIM’s are likely to remain weak, especially for SOE banks – We have built in some NIM expansion for HDFC Bank and Axis and flat for ICICI Bank. The SOE banks are likely to show flat to 5-10bps lower NIM’s – QoQ. The benefits of deposit repricing will be felt from F3Q10 onwards, in our view.

Hence NII growth will likely be sedate. We are building in stable fees progression (in line with growth seen in F1Q and broadly stable cost income ratios).

• Capital gains likely to be lower – During the quarter, long bonds went up a bit which is likely to cause limited bond gains. This should affect all banks – private banks too had 30-60% of PBT from capital gains in 1Q. We have reduced this to 10-20% across banks (except at ICICI where it still is about 40% of earnings for the quarter).
  

• Improving asset quality outlook reduces credit cost estimates – We have reduced our credit cost estimates compared to 1Q. Some of the banks were using the large capital gains to provide aggressively. With capital gains lower, provisioning can come off. We have kept credit charges broadly stable for ICICI for this quarter – likely to start coming off towards the end of F2010. We do expect some more increase in restructured loans during the quarter.

Wholesale funded institutions are likely to report strong earnings – they benefitted from lower short rates and better asset growth, in our view, compared to banks.

To see full report: INDIAN FINANCIAL SERVICES