FY10F: margins under pressure, equity capital raising partly lowers risk of NPLs After muted loan growth in 1HFY10, we expect loan growth to pick up in 2HFY10 and maintain our 16% yoy growth estimate. Further, we expect NIMs to be higher in 2HFY10 vs 1HFY10, as 18% of deposits are to come up for repricing in 2H. For FY10, on balance we expect NIMs to fall 20-30bp yoy. Our concerns about asset quality have receded partly due to equity raising by companies. In our 24 June 2009 note (At the crossroads), our estimate was that gross NPLs would rise by Rs857bn up to March 2011, implying a 3.6% GNPL ratio (2.4% as of March 2009) and, accordingly, we had factored in higher NPL provision for banks in general. However, the improving macroeconomic environment and the equity capital raising of about Rs410bn ytd and about Rs695bn in the pipeline have reduced our concerns on asset quality. In short, core earnings will likely remain under pressure in FY10, but lower NPL provision will likely ease some of the pressure on RoAs.
FY11-12F: improvement in core earnings, led by margin expansion and fees A long-term analysis of SBI’s margins suggests that NIMs come under pressure when interest costs rise, implying that the ability to pass on the total increase in cost of funds for banks in general is limited. However, as liabilities get repriced lower over the maturity cycle in FY10 (overall cost of liabilities is down 200-300bp yoy), NIMs will likely expand in FY11- 12. Also, healthy growth in core fee income (1HFY10) despite the muted loan growth has been a pleasant surprise. We expect a combination of these factors to drive improvement in core earnings in FY11-12F.
RBI's 70% coverage norm is a mere book entry; upgrade PSBs to Buy Fears of withdrawal of the accommodative monetary stance by RBI and the advice to maintain a 70% provision coverage ratio for NPLs have led to some correction in bank stocks. We believe this is a counter-cyclical measure and is structurally positive for the system in the long term. In our view, the higher provisioning may impact reported net profit, but will help strengthen the balance sheet over the medium to long term. Note an increase in coverage ratio is a mere book entry and is different from an actual loan loss charge. We thereby consider this an opportune time to Buy. In general, we raise our FY10-12 net profit estimates, driven largely by the rolling back of NPL charges. We roll forward our valuation to FY11F and upgrade public sector banks (PSBs) to Buy. On a relative basis, we now prefer PSBs over private banks. Top picks: SBI, PNB and BOB. IDBI Bank remains a contrarian Buy.
Loan growth set to accelerate After muted loan growth in 1HFY10, we expect loan growth to pick up in 2HFY10 and maintain our 16% yoy growth estimate. Most bank managements have been guiding for 18-20% yoy loan growth in FY10, on the back of a robust sanctions pipeline. We believe infrastructure loans, higher demand for working capital and retail loans will be the key drivers of loan growth. Further, the government’s borrowing programme for FY10 is 70% completed and, therefore, we believe the incremental loan-deposit ratio in 2HFY10 will be better than in 1HFY10.
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