Banks & NBFCs

2QFY17E Results Preview

7 Oct 2016

Darpin Shah
darpin.shah@hdfcsec.com
+91-22-6171-7328

Parul Gulati
parul.gulati@hdfcsec.com
+91-22-6639-3035

2QFY17E RESULTS PREVIEW

2QFY17E: Set for an Up-ride

Our BFSI coverage universe will continue to report divergent
performance in 2Q as well. In our view, PSBs will report
sequentially lower gross stress additions (albeit elevated) while
large PVT banks with corporate tilt will continue to report
elevated delinquencies. However, retail focused and Tier II PVT
banks will report relatively steady quarter. With the decline in
yields, banks are expected to report sharp rise in treasury gains,
especially PSBs. However, net earnings will continue to decline
given higher provision requirement. With the expected decline
in cost of funds and healthy AUM growth, NBFCs are expected to
continue its strong performance.

performance by the large corporate banks (AXSB and ICICIBC)

and steady performance by retail focused (KMB and IIB) and
Tier II PVT Banks (CUB, DCB and FB). Net earnings for large
corp banks will remain weak with elevated stress and NIM
compression. However, ICICIBC will get some breather with
stake sale in insurance arm. Retail focused banks are expected
to benefit from relatively higher proportion of fixed rate book
and lower exposure to stressed sectors. Tier II peers, too will
report relatively better show. We remain positive on KMB,
DCBB and CUB. While stress remains elevated at ICICIBC, its
valuations drive our positive stance. UJJIVAN is expected to
continue its healthy core operating performance. The
conversion to SFB is expected in Q4FY17, thus keeping opex
under control.

Public sector banks (PSB)

Continued abatement in stress; treasury to provide cushion:

Post the sharp deterioration in asset quality in FY16, we expect
gradual decline in gross stress additions (albeit will remain
elevated) in 2Q - the key highlight for the quarter. Margins
shall see some sequential uptick led by deposit re-pricing
catching up with the past base rate cuts, partially negated by
MCLR phasing in and lower though elevated stress. Despite
windfall treasury gains, PSB profitability shall remain dismal
owing to higher LLP. Capital being a material overhang on the
PSBs, we maintain our stance of playing the cyclical recovery
with relatively better capitalized PSBs (SBIN and BOB).

Private sector banks (PVT banks)

Elevated stress for the large corporate heavy banks, retail

focused and Tier II peers to lead the show: PVT Banks are
expected to report mixed show with relatively weak

Non-banking financial companies (NBFC)

NBFCs will continue to sustain the strong momentum across

parameters lead by sharp fall in money market rates and
healthy AUM growth. With focus towards collections, MMFS is
the only exception amongst NBFCs for slower AUM growth.
With fixed rate book and fall in CoF, NBFCs are expected to
report NIM improvement during the quarter. We continue to
remain positive on CIFC, MMFS and SCUF.

Key things to watch out for: PSBs asset quality performance is

eagerly awaited, with the expectation of sequentially lower
slippages and positive guidance. The recent RBI measures for
stress asset resolution (S4A) are an effective tool. We await the
banks assessment on its applicability on the stressed book.
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2QFY17E RESULTS PREVIEW

Change in Target Price

Company

BOB
DCBB
FB
IIB
KMB
CAFL
CIFC
MMFS

Target Price (Rs)

New
174
136
85
1,334
854
781
1,294
395

Old
162
115
70
1,220
777
749
1,208
340

Chg (%)
7.4
18.3
21.4
9.3
9.9
4.3
7.1
16.2

Multiple (x)
New
1.50
1.90
1.70
3.50
4.50
3.30
3.75
3.50

Old
1.40
1.60
1.40
3.20
4.00
3.30
3.50
3.00

Source: Banks, HDFC sec Inst Research

2QFY17E RESULTS PREVIEW

2QFY17E: PSBs - Sequentially better performance

COMPANY

SBIN

BOB

2QFY17E
OUTLOOK

AVG

AVG

WHATS LIKELY

KEY MONITORABLES

Loan growth to remain inline with industry growth at

~10%
NIM compression to drag NII growth to a mere 3%.
Monetizing for non core investments and higher
treasury gains will led to 10% PPOP growth
Higher provisions will drag net earnings ~33% YoY

Sequentially better NIM will lead to ~3% NII growth,

even while loan growth remains muted.
Muted opex growth and healthy treasury gains will
drive 23% PPOP growth.
Flattish provisions , will drive net earnings by 4.5x,
albeit on a smaller base.

Slippages from the disclosed watch-list

Benefit from the recent RBI relaxation (S4A)
Comment on consolidation of subsidiaries
Comments on recoveries and resolution in large
stressed corporates
Movement in PCR

Slippages from the disclosed watch-list

Comments on gross stress additions
Comments on growth and operational performance.
Movement in PCR

2QFY17E RESULTS PREVIEW

2QFY17E: Private banks A mixed show

COMPANY

ICICIBC

KMB

AXSB

IIB

2QFY17E
OUTLOOK

AVG

WHATS LIKELY

KEY MONITORABLES

NII to remain flat YoY with sharp YoY decline in NIM. Loan growth Commentary on impairments from the disclosed
to remain tepid at ~13%
watch-list
Stake sale in insurance arm, higher treasury gains to boost non
Commentary on growth and margins
interest income. Ex. stake sale, PPOP to remain flat YoY at ~3%
Comments on recoveries and resolution in large
Elevated provisions will lead to 25% decline in net earnings
stressed corporates
Movement in PCR / creation of contingent
provisions

GOOD

17% loan growth and stable NIMs to drive core earnings by ~17%
YoY
Muted opex growth (11%) and strong non interest income to
drive PPOP growth (32%)
Stable provisions will lead to ~38% growth in net earnings

Comments on merger integration

Growth momentum in standalone book and KMP
SA growth and improving efficiency

BAD

NII growth to come in at ~12%, despite strong loan growth of

20%. Higher interest reversals will dent NIM, despite respite
from lower CoF
Sharp rise in treasury gains will drive PPOP growth of ~33% after
~16% opex growth.
With elevated provisions, PAT is expected to de-grow ~17%

Gross stress additions , especially from the

watch-list
Traction in fees and NIM trajectory
Comments on recoveries in stressed assets

GOOD

Core earnings growth of 29% to be driven by healthy loan growth Growth in retail business,
of ~26% and NIM expansion.
Traction in fee income
Higher treasury gains to keep non interest income contribution
Growth in RWA vs. loan growth
elevated , despite slower fee growth
With stable asset quality, provisions will decline sequentially
5

2QFY17E RESULTS PREVIEW

2QFY17E: Private banks A mixed show

COMPANY

FB

CUB

DCBB

UJJIVAN

2QFY17E
OUTLOOK

WHATS LIKELY

GOOD

Continued momentum in loan growth (19%) to drive core

earnings by ~17% YoY
Strong non interest income (48% YoY) to drive 35% PPOP growth
With higher provisions, PAT growth is will be restricted at 23%

Growth and margin outlook

Impairment in core segments of retail and SME
Relapse from the restructured book

GOOD

Healthy NII growth of 20% led by ~18% loan growth and YoY NIM
improvement
With strong non-interest income growth (31%+), PPOP is
expected to grow at ~22%
With stable asset quality performance, we have factored in
increase in provisions by a mere ~2.5% QoQ
PAT growth expected at ~19%

Comments on growth momentum

Comments on a few stressed SME exposures and
recoveries.
Movement in C-I with provisions towards Staff
cost

GOOD

NII growth of 21%+ YoY (2QFY16 includes interest on tax refund

of Rs 54.6mn) to be driven by healthy 25% loan growth
However, PPOP expected at 17% owing to higher opex growth
(27%) , despite 30% rise in non-interest income (due to higher
treasury gains)
After factoring 34% tax rate, PAT to grow at ~29% YoY (flat QoQ)

Movement in C-I ratio, branch additions and opex

growth
Competition in LAP business (44% of total loans)

AUM growth is estimated to remain strong at 8.5% QoQ.

NIMs QoQ would be optically lower because of capital
consumption
PAT growth is estimated at 6% QoQ as we build in some
expenses towards SFB conversion

Continuing strong growth in Individual products

with stable asset quality
Commentary on marginal costs of funds
Reliance on Off-Book funding as the same has
implications for overall spreads and capital
consumption

GOOD

KEY MONITORABLES

2QFY17E RESULTS PREVIEW

2QFY17E: NBFCs Momentum to continue

COMPANY

SHTF

MMFS

CIFC

SCUF

2QFY17E
OUTLOOK

WHATS LIKELY

GOOD

Disbursements growth to remain flat QoQ, AUM expected

to grow at ~2.25-2.5% QoQ (21% YoY)
NII to grow at ~16% after factoring some contraction in
NIMs
We continue to factor in higher provisions in line with the
managements focus on higher PCR
PAT to jump ~15% YoY

GOOD

Slower AUM growth (11%) vs. peers, with the

managements focus on recoveries vs. growth
Sequentially, NIMs expected to improve and provisions are
expected to decline
Net earnings to jump ~67% QoQ (flat YoY)

Comments on growth
Commentary on collection efficiency and asset
quality

GOOD

NII growth of ~15% with YoY decline in NIM and ~19% AUM
growth
Relatively slower opex growth of ~12% will lead to marginal
improvement in C-AA %
Lower YoY provisions will lead to 45% growth in net
earnings

Uptick in VF business
NIM momentum
Comments on rising competition and NPAs in LAP

GOOD

20% disbursements growth will lead to ~17% AUM growth

With YoY NIM improvement NII to grow at ~20%
Net earnings to grow at 26% after factoring 20% provisions
growth and ~15% opex growth

Growth momentum
Performance of housing subsidiary

KEY MONITORABLES
Performance of CE business
Growth trends
Asset quality performance

2QFY17E RESULTS PREVIEW

2QFY17E: NBFCs - Momentum to continue

COMPANY

CAFL

2QFY17E
OUTLOOK

GOOD

WHATS LIKELY

KEY MONITORABLES

Healthy AUM growth of 33% and NIM improvement to

Shift in AUM mix
drive core earnings (+65% YoY)
NIM and efficiency improvement
With 2x rise in provisions we expect net earnings to grow at
~39% YoY

2QFY17E RESULTS PREVIEW

Financial summary
COMPANY

NII (Rs bn)

PPOP (Rs bn)

APAT (Rs bn)

2QFY17E

YoY (%)

QoQ (%)

2QFY17E

YoY (%)

QoQ (%)

2QFY17E

YoY (%)

QoQ (%)

147

3.1

2.7

112.3

9.4

1.6

26.2

-32.5

3.8

34.6

6.7

2.7

28.8

23.2

7.8

5.7

354.9

33.7

ICICIBC
KMB

52.7
19.6

0.4
16.9

2.2
2.2

113.4
13.8

119.9
31.8

117.6
4.7

22.9
7.9

-24.5
38

2.6
5.9

AXSB
IIB
FB
CUB
DCBB
Small Finance Bank
UJJIVAN
NBFCs
SHTF
MMFS
CIFC
SCUF
CAFL

45.4
14.1
7.1
2.9
1.8

11.8
28.8
16.9
19.7
21.4

0.5
3.9
2.6
2.6
2.9

48.1
12.6
4.5
2.5
0.9

32.7
25.4
34.8
22
17.6

7.7
2.3
6.5
6.2
-0.9

15.9
7
2
1.3
0.5

-16.8
25.6
22.8
18.5
28.6

2.5
6.4
18.3
3.4
0.9

2.25

57.14

7.9

1.2

82.0

7.2

0.8

96.7

6.0

13.8
7.4

15.8
-3.7

2.7
9.1

10.5
4.1

15.3
-17.8

2.3
15.3

3.9
1.4

14.7
-0.9

3.7
66.6

5.8
7.2

14.6
20

4.1
5.1

3.5
4.3

17.6
24.2

4.9
5.1

1.8
1.9

45.3
26

5.6
5.5

3.6

64.5

7.3

1.9

69.4

6.1

0.6

38.9

15.9

Public Sector Banks

SBIN
BOB
Private Sector Banks

Source: Banks, HDFC sec Inst Research

2QFY17E RESULTS PREVIEW

Peer valuation
PSU Banks
SBIN #
BOB
PVT Banks
ICICIBC #
KMB#
AXSB
IIB
FB
CUB
DCBB
SFB
Ujjivan

ABV (Rs)
FY16 FY17E FY18E

P/E (x)
FY16 FY17E FY18E

P/ABV (x)
FY16 FY17E FY18E

127
116

15.3
(7.0)

13.3
18.7

9.9
10.5

1.98
2.28

1.84
2.13

1.52
7.9
1.42 (14.4)

119
136
225
328
44
52
63

136
155
261
381
50
60
71

12.0
58.4
15.4
31.8
26.4
18.4
18.3

11.0
36.2
15.8
24.7
18.9
16.5
20.6

9.0
28.7
13.2
19.4
14.4
14.0
16.4

1.77
5.57
2.50
4.28
1.76
3.00
2.17

1.64
4.77
2.36
3.73
1.65
2.61
1.98

1.39
4.04
2.03
3.21
1.46
2.26
1.75

11.1
11.0
16.8
16.6
6.0
15.5
11.9

152

169

26.5

20.9

23.4

3.95

3.06

2.75

18.3

MCap CMP
Rating
(Rs bn) (Rs)

TP
(Rs)

1,993
380

257
165

BUY
BUY

284
174

99
72

109
77

1,461
1,435
1,267
727
126
82
36

251
783
531
1,222
73
137
125

BUY
BUY
NEU
BUY
BUY
BUY
BUY

280
854
522
1,334
85
157
136

113
120
212
285
42
46
58

55

465

NEU

510

118

MCap CMP
Rating
(Rs bn) (Rs)

TP
(Rs)

ABV (Rs)

P/E (x)

FY16 FY17E FY18E

P/ABV (x)

ROAE (%)
FY16 FY17E FY18E
8.5
5.5

ROAA (%)
FY16 FY17E FY18E

10.3 0.46
9.2 (0.78)

0.49
0.29

0.57
0.47

10.7
12.9
14.2
15.9
8.0
15.2
9.5

11.6
14.4
15.0
17.5
9.8
15.7
10.6

1.42
1.41
1.67
1.82
0.55
1.50
1.10

1.36
1.58
1.39
1.88
0.68
1.47
0.81

1.41
1.64
1.40
1.93
0.77
1.47
0.82

17.5

12.2

3.65

3.65

2.15

ROAE (%)

ROAA (%)

FY16 FY17E FY18E

FY16 FY17E FY18E

FY16 FY17E FY18E

FY16 FY17E FY18E

NBFCs
SHTF

274

1,206

BUY

1,434

397

440

478

23.2

19.0

16.7

3.04

2.52

12.2

13.5

13.7

1.85

1.99

1.97

4.31

2.74
4.23

MMFS#

214

378

BUY

395

86

88

111

31.1

26.8

21.5

3.34

11.4

12.2

13.8

1.80

1.83

1.96

CIFC

189

1,211

BUY

1,294

194

225

281

33.3

26.6

20.6

6.24

5.38

4.31

18.0

18.0

19.8

2.20

2.34

2.52

SCUF

147

2,227

BUY

2,280

651

701

760

27.7

22.4

19.1

3.42

3.18

2.93

12.2

13.4

14.0

2.72

2.88

2.86

CAFL

68

741

BUY

781

177

194

217

40.7

28.0

21.1

4.18

3.81

3.42

10.1

13.4

15.6

1.32

1.50

1.65

Source: HDFC sec Inst Research, #Adjusted for subsidiaries

10

2QFY17E RESULTS PREVIEW

Rating Definitions
BUY
: Where the stock is expected to deliver more than 10% returns over the next 12 month period
NEUTRAL
: Where the stock is expected to deliver (-) 10% to 10% returns over the next 12 month period
SELL
: Where the stock is expected to deliver less than (-) 10% returns over the next 12 month period
Disclosure:
We, Darpin Shah, MBA & Parul Gulati, MBA, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our
views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s)
in this report.
Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its
Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further
Research Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest.
Any holding in stock No
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2QFY17E RESULTS PREVIEW

HDFC securities
Institutional Equities
Unit No. 1602, 16th Floor, Tower A, Peninsula Business Park, Senapati Bapat Marg, Lower Parel,
Mumbai - 400 013
Board : +91-22-6171 7330
www.hdfcsec.com
12