Banks-Honeymoon Over

India’s banks have been on honeymoon in FY15: strong performance (+50%, 20% outperf), bouquets of macro gains (rates, inflation, currency), and planning for the eco recovery (Three trades – one done, two to go). But the reporting Q will be the settling-in grind that follows a honeymoon: modest earnings/loan growth (12%,11% resp), asset quality pressures and muted guidance. Expect a good marriage for India’s banks and the market (stay OW) but, like most marriages, it won’t be as exciting as the honeymoon.   

 Earnings steam will be modest — It’s going to be a slow earnings Q: +12% profits (+9% pre-prov ex trading), modestly lower than the prev q (13%) and largely driven by private banks (+18%; +4% for PSU’s). While margins should hold (rate cuts only post Q), trading gains could surprise (albeit bond yields flat over the Q). But slack loans, muted fee growth & still high credit costs – earnings won’t be exciting.  

 Growth/quality will define the Q, and the settling in — India’s loan growth challenge (Curious case of credit) will stand short in 4Q: at sub 10% levels, will be a BS drag. More importantly, expect asset deterioration to remain high (PSBs: 5.5%), and in sync with the prev Q (which disappointed). But shouldn’t be ‘worst case’ (or disappoint as much as the last Q): should reflect a bottoming of the asset quality cycle (rather than worsen, or improve). Whatever it does, it will define the Q. 

 Keep an eye out for — There will be surprises: look out for 1) trading gains: positive, in spite of limited yield shifts; 2) PSU wages: wage hikes (15%), pension charges (lower yields) 3) high restructurings 4) stock-specific: HDBK (growth pickup), HDFC (investment gains), ICBK (low guidance & expectations), SBI (Asset quality – given three strong Qs). On surprises, this Q should have its share. 

 Honeymoon over, settling in now, and looks like a good marriage ahead — The Q will fall short of honeymoon expectations, and the current settling in phase will seem damp on headlines & underlying. That said, India’s banks – while starting slow, should have a sustained and extended run ahead.