Banking Q3FY19E Result Preview: Select pvt and corporate banks to dominate performance

We expect corporate banks like Axis Bank, ICICI Bank, and SBI to report sequentially lower slippages and better earnings. IndusInd Bank's earnings will be closely watched for hits on its IL&FS exposure and fee-income progression.

Jan 09, 2019 01:01 IST India Infoline News Service

Private banks would have benefitted from improving market share from non-banking financial companies (NBFCs) in Q3FY19. Earnings growth would be supported by healthy loan growth, flat-to-higher margins, and operating leverage. Corporate fee income, however, could slow down, given muted corporate borrowings and risk aversion following the IL&FS transactions.

During this quarter, we believe that the credit costs of wholesale banks will decline quarter-on-quarter, while retail banks’ performance would remain strong. We expect domestic loan growth to improve for PSU banks, especially for State Bank of India (SBIN) and Bank of Baroda (BoB), partly driven by NBFC portfolio buyouts.

International loans would continue to run down, keeping overall loan growth subdued. Earnings of PSU Banks for the quarter would be driven by a) sequential moderation in slippage rates, b) lower credit costs, c) better margins due to better income recognition, and d) reversal of MTM bond losses and treasury gains.
 
Key themes to track in Q3FY19 would be a) loan growth and market-share shift to private banks, b) run rate of slippages, which is estimated to moderate, and c) reversals likely to be taken in MTM provisions and bond gains owing to a sharp decline in bond yields. We expect corporate banks like Axis Bank, ICICI Bank, and SBI to report sequentially lower slippages and better earnings. IndusInd Bank's earnings will be closely watched for hits on its IL&FS exposure and fee-income progression.
 
Top picks: ICICI Bank, SBI, Axis Bank, HDFC Bank
 
Quarterly Consensus Estimates (Q3FY19E)
Axis Bank (Rs cr.) Q3FY19E yoy (%) qoq (%)
Net interest income 5,283 11.7 1.0
Pre-provision profit 4,337 12.5 5.9
Loan-loss provisions 1,991 -27.7 -25.7
Adjusted PAT 1,435 97.6 81.8
  • Loan growth will be driven by the retail and SME segments, while the international loan segment should decline, and corporate loan growth will remain subdued.
  • Margins should remain flat-to-higher in the quarter as MCLR hikes should start showing up.
  • Asset quality should improve, given that major upfront recognition from the residual stressed asset pool was completed in H1FY19. Benefit from NCLT cases would be lower this quarter
  • To watch for: a) any kitchen sinking by the new CEO, b) treatment of IL&FS exposure, c) divergence report for FY18, and d) movement of sub-investment grade portfolio would be the key monitorable.
Bank of Baroda (Rs cr.) Q3FY19E yoy (%) qoq (%)
Net interest income 4,826 9.8 7.4
Pre-provision profit 3,447 -5.6 11.9
Adjusted PAT 850 NM 99.0
  • We estimate ~12% yoy growth in loans driven by domestic loans and expansion in margins on a sequential basis. Treasury gains to be higher qoq as well as a reversal in MTM.
  • Asset quality is likely to witness improvement. Its GNPL ratio stood at 11.8% as of Q2FY19 with ~62% PCR.
  • To watch for: a) outlook on timelines of the merger with Dena and Vijaya Banks, and b) further provisioning on IL&FS exposure.
City Union Bank (Rs cr.) Q3FY19E yoy (%) qoq (%)
Net interest income 399 9.4 0.4
Pre-provision profit 305 2.8 2.9
Loan-loss provisions 56 -19.7 18.8
Adjusted PAT 180 16.4 7.2
  • Loan growth to remain strong at 18% yoy driven by MSME, wholesale trader, and retail segments.
  • Margins will likely decline sequentially. CUBK increased its base rate only in Q2FY19, and accordingly, the re-pricing of MCLR will be delayed. Some reprieve to be seen in the yield on advances as pricing would have improved in the quarter.
  • Asset quality likely to remain stable; its GNPL ratio stood at 2.9% as of Q2FY19 with 41% PCR. One account of Rs80-85cr could slip into NPA, which was highlighted by the management in Q2FY19.
Federal Bank (Rs cr.) Q3FY19E yoy% qoq%
Net interest income 1,070 12.6 4.6
Pre-provision profit 713 27.0 2.3
Loan-loss provisions 219 56.1 18.8
Adjusted PAT 367 41.0 38.0
  • Loan growth is likely to be strong at 25% yoy, driven mainly by corporate loans.
  • Despite high growth, we expect NII to remain subdued as incremental growth is in the low-yield corporate segment. Margins could remain subdued.
  • Asset quality may remain stressed this quarter as well, with higher-than-usual slippages expected as a result of the Kerala floods. Its GNPL ratio stood at 3.1% as of Q2FY19 with a PCR of ~44%.
HDFC Bank (Rs cr.) Q3FY19E yoy% qoq%
Net interest income 12,191 18.2 3.6
Pre-provision profit 10,034 18.7 5.8
Loan-loss provisions 1,756 30.0 11.7
Adjusted PAT 5,451 17.4 8.9
  • We expect advances growth of 23% yoy and deposit growth of 21% yoy for the quarter. Growth in unsecured loans and portfolio buyout from HDFC to drive retail growth.
  • Increase in LDR and MCLRs would aid margins, but drop in CASA ratio to 41% in Q3FY19 (44% in Q3FY18) would offset the benefit.
  • Asset quality should remain benign. Its GNPA ratio stood at 1.3% as of Q2FY19, with ~70% PCR.
  • Asset quality commentary in the agriculture portfolio should be watched out for.
ICICI Bank (Rs cr.) Q3FY19E yoy (%) qoq (%)
Net interest income 6,819 19.5 6.3
Pre-provision profit 6,283 24.2 19.7
Loan-loss provisions 3,757 5.2 -5.9
Adjusted PAT 1,794 8.7 97.4
  • Ex-IL&FS slippages should come off in the quarter and some recovery from NCLT accounts resolved during the quarter should also be expected. Its GNPL ratio stood at 8.5% as of Q2FY19 (stressed asset ratio at 14.6%), with ~59% PCR.
  • Advances growth could pick up to 14% yoy with retail and SME segments outpacing corporate growth. Margins could contract sequentially due to a continued increase in the cost of funds.
  • To watch for a) further clarity on IL&FS exposure, and b) commentary on incremental growth in corporate loans.
IndusInd Bank (Rs cr.) Q3FY19E yoy (%) qoq (%)
Net interest income 2,243 18.4 1.8
Pre-provision profit 1,877 12.8 -3.8
Loan-loss provisions 1,317 604.1 177.2
Adjusted PAT 373 -60.1 -59.4
  • Loan growth would trend at 31% yoy with contributions from both retail and corporate loans.
  • Margins are likely to remain flat due to interest reversals on IL&FS exposure, negating the increases in MCLR. We have built-in moderation in fee-income growth.
  • To watch for a) accelerated provisioning on IL&FS exposure, b) completion of BHAFIN merger, c) announcements on succession planning, and d) corporate fee income growth.
RBL Bank (Rs cr.) Q3FY19E yoy (%) qoq (%)
Net interest income 607 29.8 2.3
Pre-provision profit 442 32.6 -1.6
Loan-loss provisions 91 33.7 -23.8
Adjusted PAT 220 33.3 7.8
  • We expect RBL Bank to report 31% credit growth during the quarter. NIMs for the quarter to be at ~4.14%. Asset quality to remain stable qoq.
Karur Vysya Bank (Rs cr.) Q3FY19E yoy (%) qoq (%)
Net interest income 607 29.8 2.3
Pre-provision profit 442 32.6 -1.6
Loan-loss provisions 91 33.7 -23.8
Adjusted PAT 220 33.3 7.8
  • Loan growth could improve to 11% yoy as the straight-through processing engines would have helped increase loan disbursements in the quarter.
  • Revenue growth should improve with higher loan growth. Margins would remain flat and fee income would remain weak.
  • Reduction in cost ratios would ensure that operating profitability improves as well.
  • Asset quality concerns remain. Its GNPL ratio stood at 7.7% as of Q2FY19 with 45% PCR.
SBI (Consol) (Rs cr.) Q3FY19E yoy (%) qoq (%)
Net interest income 23,900 16 3
Pre-provision profit 15,820 23 15
Adjusted PAT 2,940 NM NM
  • Advances growth is likely to pick up to 12% yoy; the decline in the international loan book should get arrested soon.
  • Margins are estimated to expand sequentially owing to better interest recognition on account of lower slippages.
  • Asset quality is expected to improve during the quarter. Its GNPL ratio stood at 9.8% as of Q2FY19 with 54% PCR.
  • To watch for a) treatment of IL&FS exposure, and b) pick-up in SME loan growth.
Yes Bank (Rs cr.) Q3FY19E yoy (%) qoq (%)
Net interest income 2,208 16.9 -8.7
Pre-provision profit 2,136 6.7 -9.8
Loan-loss provisions 691 64.0 28.7
Adjusted PAT 1,027 -4.6 6.5
  • Yes Bank will witness a sharp slowdown in loan growth, and sequentially, we expect loan book to remain flattish.
  • Margins are estimated to expand qoq due to re-pricing of MCLR-linked loans. Corporate fee income could be subdued.
  • Asset quality could deteriorate based on additional GNPLs on account of divergence/IL&FS exposure. Its GNPL ratio stood at 1.6% as of Q2FY19 with 48% PCR.
  • To watch for a) clarity on the incoming MD & CEO, b) RBI divergence numbers, and c) classification and treatment of IL&FS exposure.
Kotak Mahindra Bank (Consol) (Rs cr.) Q3FY19E yoy (%) qoq (%)
Net interest income 3,700 16 5
Pre-provision profit 3,290 24.0 13
Adjusted PAT 1,960 21 12
  • Advances growth are likely to be strong at 19% yoy and growth is likely to be broad-based, except in auto finance and business banking.
  • Margins are likely to expand qoq as the effect of prior MCLR increases becomes visible.
  • Asset quality should remain benign. Its GNPL ratio stood at 1.9% as of Q2FY19 with ~62% PCR.
  • To watch for a) commentary on stake reduction by Uday Kotak, and b) traction in deposits.

Related Story