Better visibility on asset quality; interest rates likely to decline
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Deutsche Bank AG/Hong Kong
Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should
be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should
consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST
CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 072/04/2012.
Manish Karwa
Research Analyst
(+91) 22 7158 4212
manish.karwa@db.com
Manish Shukla
Research Analyst
(+91) 22 7158 4211
manish.shukla@db.com
Top picks
Axis Bank (AXBK.BO),INR1,370.85 Buy
ICICI Bank (ICBK.BO),INR1,181.60 Buy
PNB (PNBK.BO),INR902.35 Buy
Bank of Baroda (BOB.BO),INR879.60 Buy
Shriram Transport Finance
(SRTR.BO),INR768.85
Buy
Companies Featured
Axis Bank (AXBK.BO),INR1,370.85 Buy
2012A 2013E 2014E
P/E (x) 11.1 11.7 10.1
Div yield (%) 1.4 1.5 1.8
Price/book (x) 2.1 2.1 1.8
ICICI Bank (ICBK.BO),INR1,181.60 Buy
2012A 2013E 2014E
P/E (x) 16.5 17.2 14.5
Div yield (%) 1.8 1.7 2.1
Price/book (x) 1.7 2.1 1.9
Bank of Baroda (BOB.BO),INR879.60 Buy
2012A 2013E 2014E
P/E (x) 6.5 7.0 6.0
Div yield (%) 2.4 2.2 2.6
Price/book (x) 1.2 1.1 1.0
PNB (PNBK.BO),INR902.35 Buy
2012A 2013E 2014E
P/E (x) 6.7 6.4 5.2
Div yield (%) 2.2 3.0 3.0
Price/book (x) 1.1 1.0 0.8
Shriram Transport Finance
(SRTR.BO),INR768.85
Buy
2012A 2013E 2014E
P/E (x) 11.0 12.6 9.6
Div yield (%) 1.1 1.0 1.3
Price/book (x) 2.3 2.4 2.0
This report changes earnings estimates, target
prices, and ratings (refer Figure 1 and 2)
We start 2013 with better visibility on banks than last year, especially on asset
quality and interest rates. During 2013, we expect perceptions of asset quality
to improve (gross slippages should moderate) and interest rates to decline by
about 100 bps, but loan growth to be slow and back-ended at c.16% in FY14.
While valuations may not offer much support, we expect earnings traction at
21% in FY14 for Indian financials. Government measures to resolve a few
regulatory hurdles will remain critical. Our preference for private banks/NBFCs
continues, even as we are now more positive on public banks.
ICICI, Axis top picks; we like BOB and PNB in PSUs; upgrading Bank of India
ICICI Bank and Axis Bank are our top picks as they remain most levered to
lower rates and perceptions on asset quality improvement. We like the PSU
bank space and would prefer to own a basket of smaller public banks over SBI,
given attractive valuations and better margin trends: we like PNB, BOI and
BOB among public banks. While broad concerns about Basel III and dynamic
provisions should continue to hover, we believe that attractive valuations and
likely better recoveries and treasury gains can allay most concerns.
IndusInd Bank, Yes Bank remain structural plays; we like NBFCs as well
Among the best performing banks in 2012, IIB and Yes Bank remain our
preferred names based on their structural stories. Though valuations are no
longer as attractive, we believe consistent earnings growth with stable and
improving returns will result in further upside potential. Among NBFCs, we like
Shriram Transport, and we maintain our preference for REC/PFC.
Key themes for 2013 – improving asset quality expectations; declining rates
We believe a few themes will prevail in 2013: 1) improving asset quality
expectations – Axis Bank, PSU banks should emerge as key winners as they
currently have a lot of asset quality concerns around them; 2) declining interest
rates – NBFCs, IIB and Yes Bank should be clear beneficiaries as wholesale
rates decline and lower rates give comfort on asset quality; 3) a few NBFCs
and smaller private banks will also be in focus as the RBI announces guidelines
for new bank licences, which now is a high-probability event.
Positive equity markets; government initiatives provide comfort on NPLs
A strong liquid capital market is the best comfort for a debt lender. The recent
trend of new capital raisings by promoters/companies, few talks of FDI
participation in sectors like retail and aviation, and likely asset sales have
reduced asset quality risks somewhat. Government initiatives remain crucial to
tackle the issues in the infrastructure and power sectors. While not much has
changed on the ground yet, a better sentiment, a few key measures by the
government, lower interest rates and strong capital markets can allay a bulk of
NPL concerns.
Valuation and risks
We value the Indian banks’ lending businesses on a two-stage residual income
model, insurance on appraisal value and other non-banking businesses on P/E
or P/B. A key upside risk is a much lower NPL formation driven by an
economic recovery in FY14. The biggest downside risk is a sharply weaker
macro environment, resulting in higher NPLs and provisions.