[T.S.R:17289] India Banks-The Collapse Of Margins, Cutting PO By 20-30% (Morgan Stanley)

Morgan Stanley

India Banks

The Coming Collapse of Margins, Cutting Price Targets By 20-30 Per Cent

 

Sharp revenue slowdown ahead for SOE Banks- Market is expecting some NIM compression; we expect it to fall by between 40-70 bps. The NIM compression is likely to lead to PPoP growth in single digits after the 40%+ growth in F11. SOE Bank F12E multiples have moved up to 11.1x P/E and 1.6x P/BV – these will likely be under pressure as revenues disappoint. We are cutting ratings on SBI, PNB, BOB, BOI and Canara to UW and Union, Corp and OBC to EW. The bias is likely to be negative over next 6-9 months. On a relative basis, we like ICICI Bk and HDFC Bk among Indian banks.

Deposit repricing + asset yield stickiness to cause 

Margin collapse –

A major cause of NIM expansion was the spike in bond spreads (due to an asset/liability mismatch, bond spreads widened appreciably when funding costs fell), which is likely to unwind. Moreover, we expect loan spreads to narrow, as most of the lending rate increase is already reflected in NIM's. Plus, the process of right sizing LD ratios (with 9%+ cost deposits) will also exert pressure on NIM's. This will significantly slow revenue growth and, with costs fairly inflexible, we forecast PPOP growth in single digits.

 

Asset quality must be watched closely

Our estimates already included a decline in credit costs. However, given recent dilution in provisioning norms by RBI, we have reduced our estimates further for F2012 and now build in the lowest credit costs for SOE banks in the five years. Still, given that rates are high and the economy slowing, credit costs could surprise negatively.

 

Slowing revenue growth and risks to asset quality are rising – we would not be surprised if stocks trend towards our bear cases for SOE banks. We 

would turn positive if the macro outlook improves –lower inflation and hence rates. Long term these are good stocks to own, but cyclically in a tough spot.

 

 

Safe Harbor Statement:

Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.

 

Nothing in this article is, or should be construed as, investment advice.

 

 

 

 

 

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