Financials · disbursement growth on stable to higher NIMs. Life Insurance Both SBI Life and ICICI Pru Life are expected to report strong APE growth of 35-38% driven by financialisation

Financials

3QFY18E Results Preview

8 Jan 2018

Darpin Shah [email protected] +91-22-6171-7328

Vishal Rampuria [email protected] +91-22-6171-7325

Pranav Gupta [email protected] +91-22-6171-7337

2

FINANCIALS : 3QFY18E RESULTS PREVIEW

Mixed bag After the demonitisation jolt in the previous year, 3QFY18 did not disappoint. Announcements relating to PSU recapitalization, prudent lending guidelines and the FRDI Bill kept things interesting. However the overall theme is largely unchanged as corporate lenders still remain burdened by elevated provisioning (NCLT related) while retail focused banks continue to eat away share. Though reduction in MCLR will squeeze yields, the lagged benefits of SA rate reductions and lower interest reversals will provide some respite to NIMs. The visibility on resolutions, especially in steel assets is encouraging. Developments relating to RBI divergence (for banks where the audit is ongoing) and the RBIs stance on pass through of drop in CoF to borrowers will be keenly watched. In the NBFC space, VF NBFCs are expected to report an improved performance given strong OEM sales along NIM tailwinds.

Public sector banks (PSBs)

Performance across PSBs is expected to remain muted as higher provisioning (incl NCLT and MTM) and lower treasury gains will continue to weigh on profitability. BOB is expected to report a double digit domestic book growth led by retail/ corp loans. While the slippages are expected to trend lower, a large telecom exposure (transaction related) may keep slippages elevated. However, the recent asset sale (all cash deal) will provide some cushion to asset quality. With lower treasury gains (and no extraordinary gains) and higher provisions for NCLT accounts, profitability will take a hit for SBIN. However, NIMs are expected to stabilise given benefits of SA rate reduction and no major reduction in MCLR. The key monitorables are (1) progress in resolutions, (2) allocation of recap funds and associated guidelines and (3) consolidation.

Private sector banks

PVT banks’ performance will continue to be a mixed bag. The retail-tilted and Tier II PVT Banks are expected to continue their superior performance, with healthy loan growth, stable NIMs and better asset quality trends. The corporate-heavy banks are expected to report a subdued numbers. While we expect uptick in loan growth, lower treasury gains, elevated LLP and asset

quality issues (especially AXSB) will weigh on earnings. While asset quality issues persist, commentary on resolutions, NCLT provisions, asset sale and the watchlist movement will be keenly monitored

Small finance banks (SFBs)

SFBs are expected to report better earnings. While Ujjivan and AU are expected to report strong earnings, Equitas’s credit cost will drag earning recovery. We expect loan growth of ~4-8% QoQ for SFBs. Opex would increase for Ujjivan and AU, owing to the rollout/scale up of bank branches. We remain positive on Ujjivan, owing to calibrated conversion along with normalisation of the micro finance industry. Though we are positive on AU, we find valuation rich.

HFCs

The performance of LIC is expected to be muted as NIM is expected to flat QoQ. Earnings for DHFL and Repco are expected to grow at 15-26% YoY led disbursement growth on stable to higher NIMs.

Life Insurance

Both SBI Life and ICICI Pru Life are expected to report strong APE growth of 35-38% driven by financialisation of savings and strong ULIP flows. For Max Financial, we expect 18% growth. VNB Margin expected to improve for all the players.

View

We maintain our positive stance on Retail/Tier II private banks, with KMB and CUB being preferred bets. Among the corporate-heavy banks, we prefer ICICIBC in the private sector banks, and BOB amongst the PSBs. From the NBFC peer set, we prefer vehicle financiers CIFC (steady RoA improvement) and REPCO (huge business opportunities in the affordable housing space, though growth trajectory to improve from 1QFY19). Amongst SFBs, we prefer Ujjivan, given huge opportunities in the micro financeindustry. We remain positive on Life Insurance sector driven by financialisation of savings and under penetrated market with SBI Life and ICICI Pru Life as our top pick.

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3QFY18E: Rising yields and higher provisions to dent earnings for PSBs

COMPANY 3QFY18E

OUTLOOK WHAT’S LIKELY KEY MONITORABLES

SBIN AVG

On a lower base, we expect NII growth of 9% YoY, with

a marginal NIM improvement and muted loan growth

Lower non Interest Income to be led by dip in treasury

gains and no extra ordinary gains (in 2Q SBIN gained

from stake sale in the life insurance subsidiary)

Sequential dip in provisions (in 2Q SBIN proactively

made higher provisions) will provide cushion to

earnings

Net earnings to remain flat QoQ

Comments on integration of associate banks

Comments on asset quality: movement, watch list

and resolutions

BOB AVG

Mid teen domestic loan growth to be led by retail and

corp segments.

Benefits of SA rate reduction, lower interest reversals

and focus on risk-based pricing will aid margins

Treasury gains to dip sharply QoQ owing to a jump in

G-Sec yields.

BOB is expected to provide Rs 1bn/qtr (starting Nov-

17) for the wage revision

Provisions towards NCLT exposures and focus to

improve coverage will keep credit costs elevated

On a lower base, PAT to jump ~36% YoY (flat QoQ)

NPA sale (on cash basis), to provide some cushion to

GNPAs

Progress on resolutions and comments on NCLT

exposures

Comments on two major Telecom exposures.

Comments on growth, NIM and fund raise

Consolidation

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3QFY18E: Mixed Show For Private Banks

COMPANY 3QFY18E


KMB GOOD

Loan growth of 22% and stable NIM will drive NII growth

(+21%)

PPOP to grow ~23% YoY, with controlled opex (+11/3%

YoY/QoQ) and better fee income.

With stable asset quality, LLP is expected to remain flat

PAT expected to grow at ~22% YoY and 8% QoQ

Comments on growth and SA trends

Efficiency trends and improvement

Subsidiary performance (especially KMP)

ICICIBC AVG

Uptick in loan growth (9% YoY) and stable NIM will lead to

flattish NII (+9% YoY)

Sequential drop in non-int. inc led by stake in ICICI

Lombard (Rs 20.7bn), while fees expected to grow ~8%

YoY

After proactive use of extraordinary gains , we expect

provisions to dip sequentially (+10% YoY).

PAT is expected to decline 23% YoY and 9% QoQ

Movement in impaired assets

Progress on resolutions

Commentary on growth and margins

Provisions on 2nd NCLT exposures (ICICIBC has

provisions of ~32.5% on this list)

Divergence, if any

AXSB AVG

Loan growth of ~20% (on a lower base) driven Retail

segment.

NIM compression (rising proportion of MCLR linked book

and drop in MCLR rates) will lead to a mere 7% NII growth

Lower treasury gains will lead to a dip in non interest

income. However healthy fees will provide some cushion

Asset quality pain is expected to continue. Further, with

continued aspiration to increase PCR (calc. ~56), LLP is

expected to remain elevated (dip QoQ0

PAT to jump QoQ on lower base

Impairments from BB and below exposures

Progress on resolutions

Commentary on loan growth and margins

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COMPANY 3QFY18E


IIB GOOD

On a higher base, NII growth expected at ~22% (below the avg of ~30% over last 5 qtrs). Healthy loan growth of ~24% and stable NIM to continue

Relatively slower fee growth (+21%) will also lead to PPOP growth of ~21%

With stable asset quality performance, provisions are expected to remain stable YoY

PAT growth of ~24%

Comments on integration of Bharat Financial SA traction (almost doubled YoY in 2Q) Comments on growth (especially vehicle

finance segment) and NIM

FB GOOD

21% NII growth driven by 22% loan growth and stable NIM Sharp drop in treasury gains will lead to drop in non interest

income, even as core fees continue to provide cushion We have factored in opex growth of 6% QoQ), leading to C-I

rise of ~190bps QoQ With a sharp drop in provisions (26/13% YoY/QoQ), we expect

PAT of Rs 2.47bn (-6% QoQ)

Comments on core business i.e. SME segment post GST implementation

NIM movement & efficiency ratios Asset quality: Movement in the Corp & MSME

segment Provisions on SR (peers have proactively

provided for the same)

CUB GOOD

On smaller base, loans expected to grow ~18.5% YoY (2% QoQ); NII to grow ~20% YoY with stable NIM

Lower treasury gains will lead to drop in non interest income (-17/24% YoY/QoQ)

Opex growth of 10/2% YoY/QoQ will also lead to rise in C-I ratio to ~40% (+260bps QoQ)

With lower stressed exposures, we expect provisions to dip sequentially (CUB also provided for SR’s in 2Q)

PAT to grow ~15% YoY (flat QoQ)

Comments on growth Resolutions in NPAs and comments on a few

stressed SME exposures. Movement in C-I ratio Provisions on SR

6



COMPANY 3QFY18E


KVB BAD

NII growth of ~8% YoY led by ~16% YoY loan growth and NIM compression (higher interest reversals)

Controlled opex (down 13% YoY; flat QoQ) will enable better PPOP growth (48%), despite drop in non interest income (12% QoQ)

We have factored higher provisions (3.7x YoY and 7% QoQ) towards NPA, NCLT exposures and investments

PAT to de-grow (60/40% YoY/QoQ)

Asset quality movement with slippages from the watchlist of Rs 12bn

Provisions on impaired assets Growth in granular business

DCBB GOOD

Adj for interest on tax refund in the base qtr, core earnings growth (~25%) to be driven by 23%+ loan growth and superior NIMs (fund raise in 1Q to provide fillip)

Elevated costs (+4% QoQ) and slower non-interest income growth (due to treasury) will restrict PPOP growth to 10% YoY (down 3% QoQ)

C-I ratio to rise to 62% (+195bps QoQ) We have factored a provision jump of ~6% QoQ (despite PCR

at 72%) PAT to grow ~ 15% YoY (flat QoQ)

Movement in opex and C/I ratio Comments on growth and margins Asset quality trends across segments

(especially in the LAP book) Competition is the focused business (LAP)

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3QFY18E: Good Quarter For Small Finance Banks

COMPANY 3QFY18E


UJJIVAN GOOD

NII to increase by ~12.1% QoQ; loan book growth of 5%

PPOP to improve 17.5% QoQ; YoY it is expected to drop by

32.3% owing to bank conversion and related cost increase

Provisions to be lower at Rs 175mn as we expect recovery

on the NPA book

PAT is expected to Rs 451mn

Collection in the MF book

Loan book growth; mix between MFI and Non-

MFI book

QoQ, Opex movement on SFB

EQUITAS AVG

NII is expected to be up 3% sequentially, owing to loan

book growth of 4% supported by Non-MF portfolio. We

don’t expect further run down in the MFI book

Opex run rate is expected to be largely flat sequentially, as

major costs are being incurred

Provisioning expected to be high at Rs 300mn as net NPA

was high at 2.8% in 2QFY18

PAT is expected to be at Rs 146mn

Loan book growth, especially Non-MFI book

MFI collection and provisioning

Opex movement

CASA traction

AU SFB GOOD

NII is expected to be up 4.8% sequentially, owing to loan

book growth of 8.5%

Opex is expected to increase further due to ramp up in the

banking services

Provisioning is expected to flat at Rs 290mn QoQ

PAT is expected to be up by 15% QoQ to Rs 785mn on fall

in provisioning

Loan Book Growth

Opex increase

CASA/Deposit build up

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3QFY18E: Robust Quarter For VF NBFCs, HFCs to Perform Well

COMPANY 3QFY18E


LICHF MUTED

NII to see growth of 6.1% QoQ; loan book growth of 18%

YoY driven by 16% disbursement growth

NIMs to be marginally up QoQ; Higher wholesale rate to

dent sharper cut in COF

PAT growth expected to be grow 5.7% QoQ.

Disbursement Mix in the loan book; resolution

of the developer book

Yield and prepayment

SHTF GOOD

NII growth of ~21% led by 16% AUM growth and NIM

improvement (benefitted from CoF)

Opex to gradually rise (added branches and employees

over last couple of qtrs)

Stable provisions , will drive PAT growth of ~46% YoY

Comments on shift to 90DPD and PCR

movement

Comments on growth and NIM

CIFC GOOD

VF disbursals expected to be healthy, while gradual uptick

in HE to continue

Core earnings growth of ~24% YoY, with ~15% AUM

growth and NIM improvement

After factoring in 22% rise in opex, PPOP is expected to

grow ~24% YoY

With improving asset quality trends in VF, we expect

provisions to dip (down 14% YoY)

Net earnings to grow ~40 YoY

Comments on the HE (LAP) business: Disbursals,

AUM growth, margins and asset quality

Traction in the VF business

Improvement in operational efficiency

9


3QFY18E: Robust Quarter For VF NBFCs, HFCs to Perform Well

COMPANY 3QFY18E


REPCO AVG

NII growth is expected to increase by 17.3% YoY ;

Disbursement to improve by 16% while NIMs to drop

QoQ

GNPA to improve QoQ

PAT to increase 21% YoY on higher NIMs, though down

QoQ

Loan book growth; Disbursement &

Prepayment rate

Asset quality recovery, especially in LAP

segment

DHFL GOOD

NII growth is expected to increase 10.3% QoQ ;

Disbursement is expected to grow 26% leading to AUM

growth of 26%

Sequentially, NIM is expected to be flat

PAT to improve 5.3% QOQ and 26% YoY

Loan book growth; Disbursement &

Prepayment rate

C/I ratio

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3QFY18E: Strong Quarter For Life Insurance

COMPANY 3QFY18E


SBI Life STRONG

APE to grow by 35% as financialisation has boosted flow of

savings

Margin is expected to increase marginally

ULIP is expected to be key driver of premium growth

Channel and Product Mix

Persistency Trend

ICICI Pru Life STRONG

APE to grow by 38% due to strong ULIP flows supported

by strong equity market

ULIP is expected to be key driver of premium growth

leading to QoQ drop in VNB Margin

Channel and Product Mix; Protection Premium

Growth

Persistency Trend

Max Life GOOD

APE to grow by 18% ; Expected to loose market share due

to less focuss on ULIP

VNB margin to improve sequentially

Channel and Product Mix; Protection

Premium Growth

Persistency Trend

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Financial Summary

COMPANY NII (Rs bn) PPOP (Rs bn) APAT (Rs bn)

3QFY18E YoY (%) QoQ (%) 3QFY18E YoY (%) QoQ (%) 3QFY18E YoY (%) QoQ (%)

Public Sector Banks

SBIN 192.6 8.7 3.6 148.1 3.1 (25.9) 15.2 (15.1) (3.9)

BOB 38.1 21.4 2.3 27.5 6.0 (9.5) 3.4 36.0 (3.3)

Private Sector Banks

KMB 24.8 21.1 7.3 18.7 22.6 8.6 9.9 10.7 21.5

ICICIBC 58.3 58.3 8.7 51.9 (6.1) (25.7) 18.8 (23.1) (8.7)

AXSB 46.3 6.9 2.1 37.9 (18.2) 0.5 6.3 9.3 46.5

IIB 19.2 19.2 21.6 16.5 21.3 1.2 9.3 23.7 5.5

FB 9.6 9.6 20.7 5.7 20.3 (2.0) 2.5 20.1 (6.3)

CUB 3.7 3.7 19.7 2.9 6.8 (8.7) 1.5 14.7 0.3

KVB 5.6 8.4 1.1 4.0 47.7 (6.0) 0.5 (60.4) (39.4)

DCBB 2.6 2.6 22.6 1.2 10.4 (3.1) 0.6 15.0 0.1

Small Finance Bank

EQUITAS 2.4 -13 3.0 0.5 -49.8 17.9 0.15 -67.6 33.7

AU 2.3 NA 4.8 1.5 NA 2.7 0.8 NA 15

UJJIVAN 1.8 -7.5 12.1 0.82 -32.3 17.5 0.45 2.7 560.4

NBFCs

BAF 21.1 38.6 24.8 14.6 41.4 34.4 7.4 33.5 33.2

LICHF 9.4 2.9 6.1 8.5 4.3 4.9 5.2 3.6 5.7

SHTF 17.0 20.6 4.3 13.6 19.1 3.1 5.1 46.0 5.4

CIFC 7.5 24.3 1.6 4.3 23.7 1.0 2.3 40.3 0.3

REPCO 1.1 17.3 (2.7) 0.96 18.5 (4.8) 0.56 21.1 0.2

DHFL 6.6 28.4 10.3 5.7 36.2 4.9 3.1 26.0 5.3

Source: Banks, HDFC sec Inst Research

12


Financial Summary

COMPANY APE (Rs bn) VNB Margin (%) VNB (Rs bn)

3QFY18E YoY (%) QoQ (%) 3QFY18E YoY (bps) QoQ (bps) 3QFY18E YoY (%) QoQ (%)

Insurance

SBI Life 240 36 15 15.8 NA 10 3.78 NA 16

ICICI Prudential 25 38 34 11.5 NA (110) 2.9 NA 22

Max Financial 8.2 18 18 18.8 NA 70 1.5 NA NA

Source: Banks, HDFC sec Inst Research

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Peer Valuation

Source: HDFC sec Inst Research, #Adjusted for subsidiaries ; *- TP is fair value

MCap (Rs bn)

CMP (Rs)

Rating TP

(Rs)

ABV (Rs) P/E (x) P/ABV (x) ROAE (%) ROAA (%)

FY18E FY19E FY20E FY18E FY19E FY20E FY18E FY19E FY20E FY18E FY19E FY20E FY18E FY19E FY20E

PSU Banks

SBIN # 2,645 306 BUY 387 119 157 190 20.4 13.1 7.5 1.78 1.34 1.10 4.5 6.1 10.0 0.29 0.38 0.60

BOB 374 162 BUY 215 97 136 175 24.5 12.8 7.4 1.67 1.19 0.92 4.1 7.4 11.8 0.22 0.39 0.62

PVT Banks

ICICIBC# 2,003 313 BUY 371 114 134 151 15.2 13.0 11.5 2.05 1.63 1.45 10.5 10.8 9.5 1.20 1.19 1.18

KMB# 1,909 1,003 BUY 1,213 181 205 235 36.3 30.0 23.7 4.63 3.98 3.37 13.9 13.3 14.5 1.89 1.89 1.94

AXSB 1,473 563 NEU 567 221 258 292 39.3 20.3 14.6 2.55 2.19 1.93 6.0 10.0 12.6 0.57 0.98 1.18

IIB 1,010 1,698 BUY 1,882 382 444 521 28.7 23.4 18.7 4.45 3.83 3.26 16.2 17.3 18.5 1.79 1.80 1.81

FB 217 112 BUY 141 59 65 72 20.6 16.1 12.9 1.91 1.73 1.55 9.9 10.5 11.9 0.84 0.91 0.97

CUB 116 176 BUY 206 56 66 78 19.5 16.9 14.2 3.15 2.67 2.26 15.5 15.4 15.8 1.58 1.57 1.57

KVB 89 123 BUY 151 69 72 78 26.3 15.8 9.3 1.79 1.69 1.57 6.0 8.9 14.5 0.52 0.77 1.18

DCBB 61 197 BUY 220 78 88 99 23.2 18.3 15.1 2.52 2.24 2.00 10.4 11.1 12.2 0.97 1.02 1.02

SFB

AU SFB 199 699 NEU 575 76 89 105 65.6 50.6 37.6 9.26 7.87 6.64 14.2 16.0 18.4 1.78 1.71 1.85

Equitas 53 157 NEU 160 64 67 73 97.3 39.5 22.6 2.45 2.35 2.16 2.4 5.7 9.3 0.54 1.11 1.24

Ujjivan 49 408 BUY 435 146 163 185 370.3 24.1 18.9 2.79 2.50 2.20 0.7 10.9 12.4 0.15 1.90 1.96

NBFCs

BAF* 1,039 1,811 NR 2,010 279 330 396 40.7 30.8 23.6 6.37 5.40 4.50 19.7 19.0 20.8 3.37 3.33 3.34

LICHF 288 571 BUY 675 242 283 328 14.0 12.0 10.3 2.36 2.02 1.74 17.3 17.6 17.8 1.27 1.30 1.31

SHTF 336 1,480 BUY 1,645 450 534 620 21.0 17.1 13.9 3.29 2.77 2.39 13.4 14.7 16.0 2.02 2.15 2.24

CIFC 205 1,308 BUY 1,504 267 339 422 22.7 17.7 14.5 4.90 3.85 3.10 19.2 20.7 21.1 2.65 2.81 2.84

REPCO 45 715 BUY 770 198 241 278 21.9 18.4 15.3 3.62 2.96 2.57 16.6 16.9 17.4 2.11 2.17 2.20

DHFL 192 612 BUY 685 262 288 318 20.4 16.5 14.1 2.67 2.43 2.20 12.9 14.5 15.5 1.33 1.36 1.36

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Peer Valuation

Source: HDFC sec Inst Research, # For Max Life

MCap (Rs bn)

CMP (Rs)

Rating TP

(Rs)

EV (Rs bn) VNB (Rs bn) P/EV(x) VNB (x) ROEV (%)

FY18E FY19E FY20E FY18E FY19E FY20E FY18E FY19E FY20E FY18E FY19E FY20E FY18E FY19E FY20E

Life Insurance

SBI Life 697 697 BUY 810 193.3 227.1 267.6 14.3 18.1 22.5 3.61 3.07 2.60 35.2 26.0 19.1 18.3 18.7 19.0

ICICI Pru Life

560 390 BUY 465 179.0 199.2 223.0 10.4 13.7 16.8 3.13 2.81 2.51 36.7 26.3 20.0 15.4 16.6 17.3

Max Fin # 161 600 BUY 665 74.4 84.1 95.8 6.1 7.3 8.7 3.09 2.73 2.40 25.5 19.9 15.4 18.0 18.5 19.0

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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, Vishal Rampuria, CA & Pranav Gupta, ACA, 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. HSL has no material adverse disciplinary history as on the date of publication of this report. 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. 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Documents

Financials · disbursement growth on stable to higher NIMs. Life Insurance Both SBI Life and ICICI Pru Life are expected to report strong APE growth of 35-38% driven by financialisation