indian banks turning titanic- flash september 2011
DESCRIPTION
The Indian Banks were credited for the ' Sustain Potential during 2008 crisis. But, now the doubts are cast over the Credit Quality and likely NPA's in the wake, of Rising Interest rates, following the sticky Inflation, retarding growth.TRANSCRIPT
Sept 2011 1 JM Financial Services Private Limited
Banking Flash
September 2011
Portfolio Management Group
Aniruddha Kekatpure
(91-22)-6704-3367
Sept 2011 2 JM Financial Services Private Limited
RBI Monetary Policy Review, September 2011 – Key Extracts
Since the Reserve Bank’s First Quarter Review of July 26, the global macroeconomic outlook has worsened. There is growing
consensus that sluggishness will persist longer than was earlier expected….
…..Inflationary pressures are expected to ease towards the later part of 2011-12….However, in the current scenario, with the
likelihood of inflation remaining high for a few more months, rising inflationary expectations remain a key risk. This makes it
imperative to persevere with the current anti-inflationary stance. …
…..The HSBC Purchasing Managers' Index for the manufacturing sector also suggested moderation. Corporate margins in Q1 of
2011-12 moderated across several sectors compared to their levels in Q4 of 2010-11. However, barring a few sectors, significant
pass-through of rising input costs is still visible….. In recent weeks, as a result of global risk aversion, the rupee has depreciated,
which may have adverse implications for inflation.
…. The central government’s fiscal imbalances widened during April-July of 2011 reflecting, primarily, the impact of decline in
revenue receipts coupled with pressures from non-plan revenue expenditures on account of higher petroleum and fertilizer
subsidies. Fiscal deficit at 55.4 per cent of the budget estimates in the first four months of the current fiscal was significantly
higher than that of 42.5 per cent during the corresponding period last year…
.…Although India's exports have performed extremely well in the recent period, this trend is unlikely to be sustained in the face
of weakening global demand. This, combined with the slowing down of domestic demand, to which the monetary policy stance
is also contributing, suggests that risks to the growth projection for 2011-12 made in the July Review are on the downside….
Meanwhile, inflation remains high, generalised and much above the comfort zone of the Reserve Bank. …Moreover, there is still
an element of suppressed inflation. Though global oil prices have moderated, the pass-through to domestic prices remains
incomplete. Also, current administered electricity prices are yet to reflect increase in input prices, even as many states have
initiated increases.
As monetary policy operates with a lag, the cumulative impact of policy actions should now be increasingly felt in further
moderation in demand and reversal of the inflation trajectory towards the later part of 2011-12. As such, a premature change in
the policy stance could harden inflationary expectations, thereby diluting the impact of past policy actions. It is, therefore,
imperative to persist with the current anti-inflationary stance. Going forward, the stance will be influenced by signs of
downward movement in the inflation trajectory, to which the moderation in demand is expected to contribute, and the
implications of global developments.
Sept 2011 3 JM Financial Services Private Limited
Q1FY12: Balance sheet growth slowing down with CD ratios moderating
Q1FY12 Advances Growth
17
18
19
20
20
20
21
22
22
23
24
25
26
26
3136
0 5 10 15 20 25 30 35 40
Union Bank
Federal Bank
State Bank of India
ICICI Bank
SYSTEMIC
HDFC Bank
Axis Bank
Bank of India
Corporation Bank
Punjab National
Canara Bank
Bank of Baroda
ING Vysya
Yes Bank
IndusInd Bank
Kotak Bank
Q1FY12 Deposit Growth
15
15
16
17
18
22
22
23
23
24
26
27
29
29
2944
0 5 10 15 20 25 30 35 40 45 50
ICICI Bank
HDFC Bank
Union Bank
State Bank of India
SYSTEMIC
Bank of India
Kotak Bank
Federal Bank
Bank of Baroda
Axis Bank
Canara Bank
Punjab National
IndusInd Bank
ING Vysya
Corporation Bank
Yes Bank
CD Ratio -
64
64
66
67
67
68
69
71
72
73
73
74
75
75
8383
60 65 70 75 80 85
ICICI Bank
Axis Bank
Yes Bank
Corporation Bank
ING Vysya
IndusInd Bank
Bank of Baroda
Federal Bank
Canara Bank
Union Bank
Bank of India
SYSTEMIC
Punjab National
HDFC Bank
Kotak Bank
State Bank of India
Sept 2011 4 JM Financial Services Private Limited
Margins under pressure. Flow through to RoA depends on slippages
Q1FY12 NIM -
2.1
2.2
2.4
2.6
2.8
3.0
3.1
3.3
3.4
3.4
3.6
3.8
3.9
4.25.0
0.0 1.0 2.0 3.0 4.0 5.0 6.0
Corporation Bank
Bank of India
Canara Bank
ICICI Bank
Yes Bank
ING Vysya
Union Bank
Axis Bank
Bank of Baroda
IndusInd Bank
State Bank of India
Punjab National
Federal Bank
HDFC Bank
Kotak Bank
CASA Ratio -
11
21
25
27
27
28
30
32
34
36
38
41
42
48
49
0 10 20 30 40 50 60
Yes Bank
Corporation Bank
Canara Bank
Kotak Bank
Federal Bank
IndusInd Bank
Bank of India
Union Bank
Ing Vysya
Bank of Baroda
Punjab National
Axis Bank
ICICI Bank
State Bank of India
HDFC Bank
Q1FY12 RoA -
0.58
0.66
0.83
0.84
1.03
1.09
1.14
1.16
1.20
1.31
1.34
1.38
1.47
1.63
2.11
0.00 0.25 0.50 0.75 1.00 1.25 1.50 1.75 2.00 2.25
State Bank of India
Bank of India
Union Bank
ING Vysya
Corporation Bank
Canara Bank
Federal Bank
Punjab National
Bank of Baroda
ICICI Bank
IndusInd Bank
Yes Bank
HDFC Bank
Axis Bank
Kotak Bank
Sept 2011 5 JM Financial Services Private Limited
Lower profit surprises for banks with stable asset quality & high CASA
NII Growth (Jun11) -
1
4
6
10
11
14
18
19
19
21
22
24
32
33
35
0 5 10 15 20 25 30 35 40
Corporation Bank
Canara Bank
Bank of India
ING Vysya
Federal Bank
Axis Bank
Union Bank
HDFC Bank
Punjab National
ICICI Bank
Kotak Bank
Bank of Baroda
IndusInd Bank
State Bank of India
Yes Bank
Q1FY12 PPP Growth -
(14)
(7)
(1)
(1)
2
6
12
16
18
18
19
20
21
31
35
(15) (5) 5 15 25 35
Canara Bank
Corporation Bank
ING Vysya
Bank of India
ICICI Bank
Federal Bank
Union Bank
HDFC Bank
Punjab National
State Bank of India
Kotak Bank
Bank of Baroda
Axis Bank
Yes Bank
IndusInd Bank
PBT Growth
(33)
(27)
(19)
(17)
(13)
1
9
13
28
28
33
34
37
42
(40) (30) (20) (10) 0 10 20 30 40 50
State Bank of India
Canara Bank
Bank of India
Corporation Bank
Union Bank
Punjab National
Federal Bank
Bank of Baroda
Kotak
ICICI Bank
HDFC Bank
ING Vysya
Yes Bank
Axis Bank
Sept 2011 6 JM Financial Services Private Limited
Asset Quality stable but pressures building up
Gross NPAs as % of Advances (Jun 2011)
0.17
1.04
1.06
1.07
1.08
1.46
1.59
1.67
2.00
2.15
2.57
2.69
3.52
4.36
4.49
0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 5.00
Yes Bank
HDFC Bank
Axis Bank
Corporation Bank
IndusInd Bank
Bank of Baroda
Kotak Bank
Canara Bank
Punjab National
Ing Vysya
Union Bank
Bank of India
State Bank of India
ICICI Bank
Federal Bank
Net NPAs as % of Advances (Jun 2011)
0.01
0.20
0.30
0.31
0.35
0.44
0.52
0.54
0.74
0.86
1.04
1.27
1.32
1.34
1.61
0.00 0.20 0.40 0.60 0.80 1.00 1.20 1.40 1.60 1.80
Yes Bank
HDFC Bank
IndusInd Bank
Axis Bank
Ing Vysya
Bank of Baroda
Corporation Bank
Kotak Bank
Federal Bank
Punjab National
ICICI Bank
Bank of India
Union Bank
Canara Bank
State Bank of India
Specific Coverage Ratio - PSU Banks' ratios have slipped with pressure on asset quality
20
49
51
54
55
57
66
70
71
73
77
82
83
84
95
10 20 30 40 50 60 70 80 90 100
Canara Bank
Union Bank
Corporation Bank
Bank of India
State Bank of India
Punjab National
Kotak Bank
Bank of Baroda
Axis Bank
IndusInd Bank
ICICI Bank
Federal Bank
HDFC Bank
ING Vysya
Yes Bank
Sept 2011 7 JM Financial Services Private Limited
NPAs at record lows. Should start to move up with increasing pressures.
Gross NPA Ratio - Punjab National Bank
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5.00
Jun-
06
Sep
-06
Dec
-06
Mar
-07
Jun-
07
Sep
-07
Dec
-07
Mar
-08
Jun-
08
Sep
-08
Dec
-08
Mar
-09
Jun-
09
Sep
-09
Dec
-09
Mar
-10
Jun-
10
Sep
-10
Dec
-10
Mar
-11
Jun-
11
Gross NPA Ratio - Bank of Baroda
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
Jun-
06
Sep
-06
Dec
-06
Mar
-07
Jun-
07
Sep
-07
Dec
-07
Mar
-08
Jun-
08
Sep
-08
Dec
-08
Mar
-09
Jun-
09
Sep
-09
Dec
-09
Mar
-10
Jun-
10
Sep
-10
Dec
-10
Mar
-11
Jun-
11
Gross NPA Ratio - HDFC Bank
0.50
0.70
0.90
1.10
1.30
1.50
1.70
1.90
2.10
2.30
Jun-
06
Sep
-06
Dec
-06
Mar
-07
Jun-
07
Sep
-07
Dec
-07
Mar
-08
Jun-
08
Sep
-08
Dec
-08
Mar
-09
Jun-
09
Sep
-09
Dec
-09
Mar
-10
Jun-
10
Sep
-10
Dec
-10
Mar
-11
Jun-
11
Gross NPA Ratio - Axis Bank
0.40
0.50
0.60
0.70
0.80
0.90
1.00
1.10
1.20
1.30
Jun-
06
Sep
-06
Dec
-06
Mar
-07
Jun-
07
Sep
-07
Dec
-07
Mar
-08
Jun-
08
Sep
-08
Dec
-08
Mar
-09
Jun-
09
Sep
-09
Dec
-09
Mar
-10
Jun-
10
Sep
-10
Dec
-10
Mar
-11
Jun-
11
Sept 2011 8 JM Financial Services Private Limited
Overnight Index Swaps(OIS) indicate policy tightening cycle at its fag end
Policy & OIS Rates - OIS rates pricing in last stages of near term policy rate hikes
Source: Bloomberg, JM Financial PMS
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
11.0
Jul-01
Jan-0
2
Jul-02
Jan-0
3
Jul-03
Jan-0
4
Jul-04
Jan-0
5
Jul-05
Jan-0
6
Jul-06
Jan-0
7
Jul-07
Jan-0
8
Jul-08
Jan-0
9
Jul-09
Jan-1
0
Jul-10
Jan-1
1
Jul-11
Repo Rate 1 Year OIS 5 Year OIS
India OIS 2/5 Spread - Above the peak levels of 2008.
Source: Bloomberg, JM Financial PMS
-250
-200
-150
-100
-50
0
50
100
150
Aug-0
1
Feb-0
2
Aug-0
2
Feb-0
3
Aug-0
3
Feb-0
4
Aug-0
4
Feb-0
5
Aug-0
5
Feb-0
6
Aug-0
6
Feb-0
7
Aug-0
7
Feb-0
8
Aug-0
8
Feb-0
9
Aug-0
9
Feb-1
0
Aug-1
0
Feb-1
1
Aug-1
1
Sept 2011 9 JM Financial Services Private Limited
However, Oil prices though moderating are still at elevated levels.
Average Prices - Prices impacting India basket marginally lower. Spread higher
Source: Bloomberg, JM Financial PMS
8595
102
9187
106
117 113
85
101
111 108
211 15
22
0
20
40
60
80
100
120
140
Q4CY10 Q1CY11 Q2CY11 Q3CY11
WTI Brent Dubai Oman Brent WTI Spread
India Crude Basket - Though moderating but still well above $100/bbl
Source: Bloomberg, JM Financial PMS
0
20
40
60
80
100
120
140
160
Jun-
07
Sep
-07
Dec
-07
Mar
-08
Jun-
08
Sep
-08
Dec
-08
Mar
-09
Jun-
09
Sep
-09
Dec
-09
Mar
-10
Jun-
10
Sep
-10
Dec
-10
Mar
-11
Jun-
11
Sep
-11
Brent WTI Spread - Resumption of Libyan production should narrow the spread
Source: Bloomberg, JM Financial PMS
-10
-5
0
5
10
15
20
25
30
Jun-0
7
Sep-0
7
Dec-0
7
Mar-
08
Jun-0
8
Sep-0
8
Dec-0
8
Mar-
09
Jun-0
9
Sep-0
9
Dec-0
9
Mar-
10
Jun-1
0
Sep-1
0
Dec-1
0
Mar-
11
Jun-1
1
Sep-1
1
Sept 2011 10 JM Financial Services Private Limited
Coupled with high oil prices, expansionary fiscal policy is keeping…
Revenue Deficit (% of GDP) - Expansionary fiscal policy keeping inflation high
Source: Bloomberg, JM Financial PMS
1
2
3
4
5
6
7
8
Mar-
05
Jun-0
5
Sep-0
5
Dec-0
5
Mar-
06
Jun-0
6
Sep-0
6
Dec-0
6
Mar-
07
Jun-0
7
Sep-0
7
Dec-0
7
Mar-
08
Jun-0
8
Sep-0
8
Dec-0
8
Mar-
09
Jun-0
9
Sep-0
9
Dec-0
9
Mar-
10
Jun-1
0
Sep-1
0
Dec-1
0
Mar-
11
Jun-1
1
Fiscal Deficit (% of GDP) - High deficits crowding out private investments
Source: Bloomberg, JM Financial PMS
2
3
4
5
6
7
8
9
10
Mar-
05
Jun-0
5
Sep-0
5
Dec-0
5
Mar-
06
Jun-0
6
Sep-0
6
Dec-0
6
Mar-
07
Jun-0
7
Sep-0
7
Dec-0
7
Mar-
08
Jun-0
8
Sep-0
8
Dec-0
8
Mar-
09
Jun-0
9
Sep-0
9
Dec-0
9
Mar-
10
Jun-1
0
Sep-1
0
Dec-1
0
Mar-
11
Jun-1
1
Sept 2011 11 JM Financial Services Private Limited
…. headline inflation stubbornly high thereby…
Infllation (WPI) - Moderation in headline but core component still high
Source: Bloomberg, JM Financial PMS
-2
0
2
4
6
8
10
12
Apr-
05
Jul-05
Oct-
05
Jan-0
6
Apr-
06
Jul-06
Oct-
06
Jan-0
7
Apr-
07
Jul-07
Oct-
07
Jan-0
8
Apr-
08
Jul-08
Oct-
08
Jan-0
9
Apr-
09
Jul-09
Oct-
09
Jan-1
0
Apr-
10
Jul-10
Oct-
10
Jan-1
1
Apr-
11
Jul-11
(%)
WPI Average
Manufacturing Inflation - Continues to remain stubbornly high
Source: Bloomberg, JM Financial PMS
-1.00
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
Apr-
05
Jul-05
Oct-
05
Jan-0
6
Apr-
06
Jul-06
Oct-
06
Jan-0
7
Apr-
07
Jul-07
Oct-
07
Jan-0
8
Apr-
08
Jul-08
Oct-
08
Jan-0
9
Apr-
09
Jul-09
Oct-
09
Jan-1
0
Apr-
10
Jul-10
Oct-
10
Jan-1
1
Apr-
11
Jul-11
Sept 2011 12 JM Financial Services Private Limited
…. forcing RBI to maintain a hawkish inflation fighting stance, but…
RBI Policy Rates - Further tightening likely to be more data & oil price dependent
Source: Bloomberg, JM Financial PMS
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
Jan-0
1
Jul-01
Jan-0
2
Jul-02
Jan-0
3
Jul-03
Jan-0
4
Jul-04
Jan-0
5
Jul-05
Jan-0
6
Jul-06
Jan-0
7
Jul-07
Jan-0
8
Jul-08
Jan-0
9
Jul-09
Jan-1
0
Jul-10
Jan-1
1
Jul-11
Cash Reserve Ratio Repo Reverse Repo
State Bank of India Rates (%) - Lending rates have surpassed 2008 highs
Source: Bloomberg, JM Financial PMS
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
Apr-
92
Apr-
93
Apr-
94
Apr-
95
Apr-
96
Apr-
97
Apr-
98
Apr-
99
Apr-
00
Apr-
01
Apr-
02
Apr-
03
Apr-
04
Apr-
05
Apr-
06
Apr-
07
Apr-
08
Apr-
09
Apr-
10
Apr-
11
SBI Prime Lending rate SBI 1 Year Deposit Rate
Systemic Liquidity - RBI continues to maintain systemic liquidity in deficit mode
Source: Bloomberg, JM Financial PMS
-1500
-1000
-500
0
500
1000
1500
2000
Jun-0
7
Aug-0
7
Nov-0
7
Feb-0
8
May-0
8
Jul-08
Oct-
08
Jan-0
9
Apr-
09
Jun-0
9
Sep-0
9
Dec-0
9
Mar-
10
May-1
0
Aug-1
0
Nov-1
0
Feb-1
1
May-1
1
Jul-11
12345678910111213141516
Reverse Repo Funds (Rs.Bn.) (LHS) 3m Commercial Paper Rate (%) (RHS)
Sept 2011 13 JM Financial Services Private Limited
….high interest rates are adversely affecting the investment cycle thereby…
HSBC Markit India Manufacturing PMI - Sharp deceleration since April 2011
Source: Bloomberg, JM Financial PMS
40
45
50
55
60
65
Jan-0
6
Apr-
06
Jul-06
Oct-
06
Jan-0
7
Apr-
07
Jul-07
Oct-
07
Jan-0
8
Apr-
08
Jul-08
Oct-
08
Jan-0
9
Apr-
09
Jul-09
Oct-
09
Jan-1
0
Apr-
10
Jul-10
Oct-
10
Jan-1
1
Apr-
11
Jul-11
Capital Goods Growth - Capex cycle continues to remain weak. Reforms critical.
Source: Bloomberg, JM Financial PMS
-30
-20
-10
0
10
20
30
40
50
60
70
Ap
r-0
6
Ju
l-0
6
Oct-
06
Ja
n-0
7
Ap
r-0
7
Ju
l-0
7
Oct-
07
Ja
n-0
8
Ap
r-0
8
Ju
l-0
8
Oct-
08
Ja
n-0
9
Ap
r-0
9
Ju
l-0
9
Oct-
09
Ja
n-1
0
Ap
r-1
0
Ju
l-1
0
Oct-
10
Ja
n-1
1
Ap
r-1
1
Ju
l-1
1
IIP Capital Goods Growth (%) 3 Month Moving Average
Industrial Production Growth - Political uncertainty & high rates feeding through
Source: Bloomberg, JM Financial PMS
-10
-5
0
5
10
15
20
25
Apr-
06
Jul-06
Oct-
06
Jan-0
7
Apr-
07
Jul-07
Oct-
07
Jan-0
8
Apr-
08
Jul-08
Oct-
08
Jan-0
9
Apr-
09
Jul-09
Oct-
09
Jan-1
0
Apr-
10
Jul-10
Oct-
10
Jan-1
1
Apr-
11
Jul-11
India Industrial Production Growth (%) 3 Month Moving Average
Sept 2011 14 JM Financial Services Private Limited
.…resulting in declining credit & economic growth.
India Banking Credit Growth (%) - Reflecting slowdown in Investment cycle
Source: Bloomberg, JM Financial PMS
5
10
15
20
25
30
35
Aug-9
7
Fe
b-9
8
Aug-9
8
Fe
b-9
9
Aug-9
9
Fe
b-0
0
Aug-0
0
Fe
b-0
1
Aug-0
1
Fe
b-0
2
Aug-0
2
Fe
b-0
3
Aug-0
3
Fe
b-0
4
Aug-0
4
Fe
b-0
5
Aug-0
5
Fe
b-0
6
Aug-0
6
Fe
b-0
7
Aug-0
7
Fe
b-0
8
Aug-0
8
Fe
b-0
9
Aug-0
9
Fe
b-1
0
Aug-1
0
Fe
b-1
1
Aug-1
1
Credit Growth Average Credit Growth
India GDP Growth (QoQ) - RBI tightening slowing the trend growth
Source: Bloomberg, JM Financial PMS
5.0
6.0
7.0
8.0
9.0
10.0
11.0
Jun
-05
Sep-0
5
Dec-0
5
Mar-
06
Jun
-06
Sep-0
6
Dec-0
6
Mar-
07
Jun
-07
Sep-0
7
Dec-0
7
Mar-
08
Jun
-08
Sep-0
8
Dec-0
8
Mar-
09
Jun
-09
Sep-0
9
Dec-0
9
Mar-
10
Jun
-10
Sep-1
0
Dec-1
0
Mar-
11
Jun
-11
Annualised Rolling Four Quarters QoQ GDP Growth (%)
Sept 2011 15 JM Financial Services Private Limited
Headwinds persist. Reforms to determine severity of NPA cycle.. I
Earnings visibility getting clouded
Operating environment for financial sector should remain challenging as RBI continues to target near double digit inflation
despite decelerating economic growth momentum. These challenges are getting compounded due to 1. Overshoot in budgeted
government deficits since fiscal policy continues to remain expansionary & 2. Paralyzed legislative & administrative process in
the wake of ongoing corruption scandals. The slowing down in credit demand has been material even accounting for the slack
season and there is considerably lesser headroom within system to absorb rate hikes without affecting credit quality.
Investment & infrastructure capex cycle has become subdued and loan sanctions in these segments have dropped materially.
Spread stabilization to be dependent on monetary policy stance
Margin outlook dependent on 1. Composition of Deposits 2. Pass through of costs & 3. Pace of balance sheet growth.
Composition of Deposits: Higher term deposit rates are resulting in cannibalization of CASA deposits in favor of term deposits
thereby increasing cost of deposits. Since RBI has been in rate tightening mode for almost 18 months and effective tightening
of 500bps from the low (150bps in last 6 months) interest rates are nearer peak levels. However, deposit rates are expected to
remain sticky on government deficits unless RBI lowers the statutory reserve requirements to infuse liquidity in to the system
thereby lowering the wholesale borrowing costs. Typically the banking system subscribes to ~40% of GOI bond issues & with
the slippage in budgeted deficit targets, large part of funds would get diverted towards statutory requirements. Hence deposit
rates would need to remain attractive to help banks mobilize deposits for credit growth.
Pass through of costs: Slowdown in investment cycle is resulting in most banks targeting growing the Retail, SME & Agriculture
portfolios to generate loan book growth. However, it is difficult to pass costs in agriculture, SME & mortgage segments without
affecting asset quality. As long as the economy doesn’t slow down sharply & asset quality remains stable, the need to be
absorb costs for the banks will be lower thereby helping margins.
Pace of balance sheet growth: Assuming sustainable growth rate of 7-8%, in line with RBI comfort zone, & credit multiplier of
2x, sustainable systemic credit growth can be 14-16%. Current systemic CD ratio at ~73% means credit growth to be function
of deposit growth since bulk of investment book close to statutory levels. Credit growth could be 17-18% if deposit growth
stays healthy. Well capitalized banks with high CAR will be in a position to grow higher than the systemic average and gain
market share from banks looking to conserve capital to protect against asset quality deterioration. Current credit demand
more for working capital loans v/s Investment demand as can be seen from the improved utilization of working capital limits.
Sept 2011 16 JM Financial Services Private Limited
.
NPA cycle at cyclical low and due for a turn
NPA cycle is at a cyclical low and has likely turned with the rising stress levels on asset quality. The stress levels though are
still at manageable levels at an aggregate balance sheet levels of banks and certainly at the systemic level. Current asset
quality pressures are largely coming from Airlines, Textiles, Gems & Jewelry, Agriculture & MFIs. Fears of large delinquencies
from infrastructure segment specifically power sector have been persistent and increasingly making the markets nervous. At a
systemic level the banking sector has largest exposure to infrastructure segment since bulk of the credit growth over last few
years has been on the back of lending to infrastructure segment specifically power & telecom. However, to what extent will the
banks remain insulated from the turn in NPA cycle and how sharply will the cycle turn will largely be a function of 1. Domestic
Policy actions & Policy Reforms & 2. Capital Flows.
Power sector case study: Risks to the power sector exposure of banks & FIs are primarily arising from two levels –
1. Off-taker Risk: On account of pricing issues of SEBs and 2. Fuel Risk: Shortages of Coal/ Gas to delay cash flow to projects
thereby increasing risks to creditors.
The off-taker risk can be managed/ mitigated through policy actions improving the financial health of the SEBs. SEB losses are
primarily on account of static tariffs even in face of rising costs of power production/ procurement, non payment of subsidies
by the state governments to the SEBs, large capex on T&D without commensurate returns since 100% metering still not done,
free power to agricultural sector and rising wages, salaries. In light of these, the power ministry recently held a conference of
state power ministers on state distribution reforms of SEBs to focus on urgent steps & improve the health of SEBs and passed
resolutions to effect the same. What will be critical though is the implementation of these resolutions. Upon implementation of
agreed resolution, the default risk of distribution companies (discoms) of SEBs should substantially reduce.
Structurally, fuel risk is the more worrisome risk though even here a large part can be mitigated through policy initiatives. Mid
size power companies without fuel linkages likely to get under stress. The probability of restructuring is higher of bad loans
on account of the fuel supply risk.
Conclusion: Key headwinds: 1. Pressure on Revenues: Lower credit growth coupled with margin pressure 2. Pressure on
Profits: Rising credit costs & 3. Policy inaction & delayed reforms impacting business confidence and industrial activity. After
effectively tightening the monetary policy by 500bps since early 2010, RBI’s hawkish stance should moderate. Further
tightening will be primarily Oil price dependent since domestic demand has begun to moderate. Financial sector being a
leveraged sector on the economy would be under pressure with global and domestic macro headwinds gathering momentum,
sentiment would likely remain weak towards financial stocks. Valuations though are hovering near or below long term
averages, but not near trough levels as yet. Prefer private sector banks to public sector banks since they are better capitalized to
withstand the challenging environment.
Headwinds persist. Reforms to determine severity of NPA cycle.. II
Sept 2011 17 JM Financial Services Private Limited
Consensus Earnings Estimates & Valuations
NEW PRIVATE BANKS CMP MCAP MCAP
(Mn$) (Rs.Mn) 2012 2013 2012 2013 2012 2013 2012 2013 2012 2013
ICICI BANK LTD 884 21,549 1,018,562 55.4 67.2 508 552 12.0 13.5 16.0 13.1 1.74 1.60
HDFC BANK LTD 484 23,915 1,130,424 21.6 27.4 125 147 18.5 20.1 22.4 17.6 3.87 3.30
AXIS BANK LTD 1133 9,884 467,186 97.8 119.6 537 635 19.6 20.5 11.6 9.5 2.11 1.78
KOTAK MAHINDRA BANK LTD 471 7,353 347,553 13.7 16.6 170 196 15.3 15.9 34.4 28.3 2.77 2.40
INDUSIND BANK LTD 266 2,627 124,171 16.0 20.4 96 113 17.6 19.4 16.6 13.1 2.78 2.36
YES BANK LTD 281 2,080 98,335 26.8 33.8 136 167 21.8 22.5 10.5 8.3 2.07 1.68
Wt. Average 3,186,230 19.5 15.7 2.71 2.35
OLD PRIVATE BANKS CMP MCAP MCAP
(Mn$) (Rs.Mn) 2012 2013 2012 2013 2012 2013 2012 2013 2012 2013
FEDERAL BANK LTD 371 1,343 63,496 41.9 51.4 322 361 13.5 14.9 8.9 7.2 1.15 1.03
KARUR VYSYA BANK LTD 361 823 38,900 48.8 59.2 250 295 21.4 22.0 7.4 6.1 1.45 1.23
ING VYSYA BANK LTD 290 920 43,471 30.6 37.5 257 289 13.4 13.8 9.5 7.7 1.13 1.00
JAMMU & KASHMIR BANK LTD 866 888 41,982 147.2 165.0 830 960 18.6 18.2 5.9 5.2 1.04 0.90
SOUTH INDIAN BANK LTD 23 559 26,443 3.0 3.6 18 21 17.9 18.3 7.9 6.6 1.32 1.13
CITY UNION BANK LTD 45 386 18,261 6.3 7.8 31 37 23.0 22.5 7.1 5.8 1.47 1.22
KARNATAKA BANK LTD 92 367 17,353 16.2 16.2 136 146 10.3 12.1 5.7 5.7 0.68 0.63
DEVELOPMENT CREDIT BANK LTD 48 204 9,621 1.9 3.2 33 36 6.4 9.3 25.7 15.1 1.47 1.33
DHANLAXMI BANK LTD 80 143 6,781 7.1 10.7 109 119 6.7 8.7 11.3 7.5 0.73 0.67
Wt. Average 266,309 8.5 6.9 1.18 1.03
PUBLIC SECTOR BANKS CMP MCAP MCAP
(Mn$) (Rs.Mn) 2012 2013 2012 2013 2012 2013 2012 2013 2012 2013
STATE BANK OF INDIA 1946 26,137 1,235,454 180.5 235.6 1494 1717 17.4 17.7 10.8 8.3 1.30 1.13
PUNJAB NATIONAL BANK 981 6,573 310,666 160.6 194.3 754 911 22.3 22.5 6.1 5.0 1.30 1.08
BANK OF BARODA 774 6,415 303,213 120.3 144.1 606 722 21.0 21.3 6.4 5.4 1.28 1.07
CANARA BANK 434 4,064 192,085 93.3 111.1 481 574 20.1 20.2 4.6 3.9 0.90 0.76
BANK OF INDIA 324 3,748 177,142 52.4 66.8 323 376 16.4 18.2 6.2 4.9 1.00 0.86
UNION BANK OF INDIA 238 2,640 124,791 47.7 57.6 246 291 19.7 20.4 5.0 4.1 0.97 0.82
IDBI BANK LTD 107 2,236 105,698 19.6 23.2 142 161 13.8 15.2 5.5 4.6 0.76 0.67
ORIENTAL BANK OF COMMERCE 292 1,805 85,296 57.9 71.5 391 446 15.0 16.4 5.1 4.1 0.75 0.66
ALLAHABAD BANK 164 1,655 78,218 36.6 45.3 186 222 19.9 21.1 4.5 3.6 0.88 0.74
INDIAN BANK 208 1,892 89,435 43.9 53.1 226 267 20.4 21.2 4.7 3.9 0.92 0.78
INDIAN OVERSEAS BANK 100 1,314 62,091 21.1 26.9 143 161 15.3 17.5 4.8 3.7 0.70 0.62
CENTRAL BANK OF INDIA 105 1,435 67,829 28.1 29.6 152 182 16.7 16.4 3.7 3.5 0.69 0.58
CORPORATION BANK 449 1,406 66,467 100.4 119.6 549 639 19.2 19.8 4.5 3.8 0.82 0.70
Wt. Average 2,898,387 7.7 6.1 1.14 0.98
Consensus EPS Est Consensus BVPS Consensus RoE P/E Ratio
Consensus EPS Est Consensus BVPS
Consensus BVPS P/B RatioConsensus EPS Est Consensus RoE P/E Ratio
Consensus RoE P/E Ratio P/B Ratio
P/B Ratio
Sept 2011 18 JM Financial Services Private Limited
Disclaimer
This report and information contained in this report is solely for information purpose and may not be used or considered as an offer document or solicitation of
offer to buy or sell or subscribe for securities or other financial instruments. The investment as mentioned and opinions expressed in this report may not be
suitable for all investors. In rendering this information, we assumed and relied upon, without independent verification, the accuracy and completeness of all
information that was publicly available to us. The information has been obtained from the sources we believe to be reliable as to the accuracy or completeness.
While every effort is made to ensure the accuracy and completeness of information contained, the JM Financial Services and its affiliates takes no guarantee and
assumes no liability for any errors or omissions of the information. This information is given in good faith and we make no representations or warranties, express
or implied as to the accuracy or completeness of the information. No one can use the information as the basis for any claim, demand or cause of action. JM
Financial Services and its affiliates shall not be liable for any direct or indirect losses or damage of any kind arising from the use thereof. Opinion expressed is
our current opinion as of the date appearing in this report only and are subject to change without any notice.
Recipients of this report must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient.
The recipient should independently evaluate the investment risks and should make such investigations as it deems necessary to arrive at an independent
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of such an investment. Any comments or statements made herein are those of the analyst and do not necessarily reflect those of JM Financial Services and its
affiliates.
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JM Financial Services Pvt. Ltd.
Corp: 3rd
Floor ,Apeejay House , 3 Dinshaw Vachha Road , Churchgate , Mumbai – 400020
Regd: 141, Maker Chambers III, Nariman Point Mumbai – 400021.
NSE - Capital Market INB 231054835 | F&O Segment INF 231054835 | BSE - Cash Market INB 011054831
F&O Segment INF 011054831 | Depository Participant – NSDL DP: IN-DP-NSDL-241-2004
CDSL DP: IN-DP-CDSL-236-2004 | Portfolio Manager: INP 000000621