Financial Services Initiations 2Jul10

120 pages
288 views

Please download to get full document.

View again

of 120
All materials on our website are shared by users. If you have any questions about copyright issues, please report us to resolve them. We are always happy to assist you.
Share
Description
Financial services Table of contents Headed for next cycle of growth ......................................................................................... 4 Looking ahead: Further scope for RoA improvement .................................................... 15 DuPont convergence a key trend ...................................................................................... 15 Previous decade: Inefficiency to efficiency....................................................................
Tags
Transcript
       Financial services 2 July 2010 Indiabulls Research 2 Table of contents Headed for next cycle of growth ......................................................................................... 4   Looking ahead: Further scope for RoA improvement .................................................... 15   DuPont convergence a key trend ...................................................................................... 15   Previous decade: Inefficiency to efficiency ........................................................................ 15   Next decade: Further scope for RoA improvement ........................................................... 16   How to play the next cycle: Learning from our across-the-cycle analysis ................... 21   How to play the next cycle ................................................................................................. 21   Our sector call: Outperform ............................................................................................... 26  Companies ICICI Bank ............................................................................................................................ 39   Axis Bank ............................................................................................................................. 51   Punjab National Bank ......................................................................................................... 61   Union Bank of India ............................................................................................................ 71   HDFC Bank........................................................................................................................... 81   Bank of Baroda .................................................................................................................... 91   Bank of India ...................................................................................................................... 101   State Bank of India ............................................................................................................ 111      Institutional  Research also available on Bloomberg (IBULLS <GO>), Thomson, Reuters and FactSet page.   Figure 1: Valuation summary   Units as shown P/ABV (x) P/E (x) RoE (%)FY11E FY12E FY11E FY12E FY11E FY12E ICICI 1.7 1.6 19 14 9 11Axis 2.8 2.4 17 13 17 19PNB 1.7 1.4 7 6 24 24Union 1.6 1.2 7 5 21 22HDFC Bk 3.7 3.2 24 18 16 18BoB 1.6 1.3 7 6 21 22BoI 1.4 1.2 8 6 16 18SBI 2.2 1.9 13 10 16 18 Source: Company, Indiabulls research. 2 July 2010   India   Financial services Recommendation summary Company Reco TP Upside (%) ICICI Bk OP 1,052 25Axis Bk OP 1,529 24PNB OP 1,276 25Union Bk OP 381 21HDFC Bk OP 2,297 20BOB Neutral 803 12BOI Neutral 343 (4)SBI Neutral 2,520 11 Source: Indiabulls research. Performance (%) 1m 3m 1yr  ICICI Bk 0.4 (11.7) 15.3Axis Bk 4.4 5.1 41.9PNB 2.3 0.4 49.2Union Bk 11.1 3.5 26.3HDFC Bk 2.8 (1.6) 26.9BOB 1.5 10.8 59.5BOI 10.9 3.1 (0.0)SBI 2.4 7.6 27.1Nifty 5.7 (0.7) 21.0 Source: Bloomberg. Saikiran Pulavarthi saikiran.pulavarthi@indiabulls.com+91 22 3980 5203 Deepak Agrawal deepak.agrawal@indiabulls.com+91 22 3980 5496 The banking sector is headed for its next cycle with balance sheet pick-up imminent in 2HFY11 after an adjustment phase of two years. Earningdrivers look quite healthy with higher earnings growth driven by uptickin credit, stable margins, improving asset quality, and lower MTM losses.Our benchmarking analysis suggests there is further scope for RoAimprovement within the sector, which would drive valuations ahead. Weinitiate coverage of the sector with Outperform rating.   Headed for next cycle of growth Balance sheet pick-up is imminent after the adjustment phase of the last two years.We expect a healthy loan growth of 22%, loan restructuring worries to fade off after1HFY11 as a year passes by since the major restructuring done under RBI’s specialdispensation scheme, lower MTM losses with banks having derisked their treasuryportfolios and stable margins as pricing power comes back to banks with increasingcredit growth and decreasing liquidity in the system. Looking ahead: Further scope for RoA improvement Benchmarking the efficient banks in core lending and fee income operations leavesfurther scope for RoA improvement for the banks going ahead. We believe Dupontconvergence between RoA leaders and RoA laggards, wherein RoA laggards to showsignificant improvement in operational parameters, is a key trend to watch out for. Ouracross-the-cycle analysis suggests that such structural improvements in RoAcomposition will drive the valuations. How to play the next cycle: Learning from our across-the-cycle analysis RoA leaders (who consistently delivered above Industry RoA) are likely to emerge asmulti-year alpha bets. RoA laggards (who consistently delivered below Industry RoA)can be significant outperformers if and when they are able to improve theirperformance. Also, RoA cyclical behaviour generally lasts 3-4 years on an averageand our analysis suggests RoA direction is the key for stock performance. Our sector call: Outperform As the sector heads for a new cycle of growth, we expect stocks to trade at a premiumto the past five years’ valuations driven by higher profitability and RoE. We initiateICICI Bank, Axis, PNB, Union, HDFC Bank with Outperform , and BoB, BoI, and SBIwith Neutral rating. Initiating coverage Banking sector  Next cycle of growth    Financial services 2 July 2010 Indiabulls Research 4 Headed for next cycle of growth Balance sheet pick-up is imminent after the adjustment phase of the last two years. Weexpect a healthy loan growth after the credit drought of FY10, fading-away of loanrestructuring worries after 1HFY11 as a year passes by since the major restructuring doneunder RBI’s special dispensation scheme. In terms of earnings, we see FY11E PAT growthrates at 17% if no big downside occurs as NIMs have peaked and trading gains lowered.We expect earnings growth to pick up to 27% in FY12E. Loan growth at CAGR 22% during FY10-12E We build in system loan growth at CAGR 22% during FY10-12E after a credit drought inFY10 assuming a 1.5x consensus nominal GDP multiplier, in line with long term historicalaverage ( refer Figure 2  ). We do not foresee credit growth to nominal GDP growth ratioabove 1.5x (against 2x in the last decade) as last decade’s high credit growth wassupported by very low bank credit penetration which is not the case at present (refer Figures   7 & 8). Figure 2: Credit growth to nominal GDP growth ratio x 1.81.41.52.00.00.51.01.52.02.5Avg since 1951Avg since 1981Avg since 1991Avg since 2001   Source: RBI, Indiabulls research. What will drive credit growth in FY11-FY12? We believe infrastructure and retail segments to be the growth drivers in FY11-FY12E inaddition to corporate capex which continues to remain subdued post the recent crisis. Infrastructure to contribute 25% of incremental credit ·   Infrastructure is expected to contribute 25% of incremental credit in FY11 backed bystrong demand from segments like power, roads and telecom. ·   Planning Commission estimates have put demand from infrastructure projects atRs1080bn in FY11 backed by very strong growth from power and road projects. ·   Private participation has increased in the infrastructure space. ·   Healthy capital markets have also enabled projects to attract equity capital, whichhelps in boosting demand for credit. ·   Considering that real interest rates continue to remain negative, we believe demandfrom infrastructure projects should continue to remain buoyant until FY12.
Related Search
We Need Your Support
Thank you for visiting our website and your interest in our free products and services. We are nonprofit website to share and download documents. To the running of this website, we need your help to support us.

Thanks to everyone for your continued support.

No, Thanks