Indian Bank earnings
The Nifty Bank Index (NSEBANK) has rebounded 10% from its March lows on better sentiment for the Indian market and constructive earnings results from some of the major bank groups. The VFTP Thematic Model Portfolio holds the Nifty Index and NSEBANK.
The Indian stock exchange has been the surprise regional outperformer quarter-to-date up, almost 8%. This recovery has been driven by stronger than expected economic data, higher than anticipated revenues from GST collection and better corporate results for the March reporting season. So far, earnings growth for the fiscal fourth quarter has reached an 18-month high of 12.13% from a year earlier, improving on the 9% pace in the period ending December. Also, operating profit margins have improved by 1% point to 26%.
Last week, ICICI, the country’s second largest private lender, reported an expected 50% drop in its fiscal-fourth quarter profit and higher provisions to comply with the RBI’s stricter loan classification standards. However, the stock rallied 7% with analysts convinced that the worst is over for the bank in terms of impaired assets. Also, there is a fair amount of optimism about the ICICI’s business strategy going forward. In the management call, the company gave clear guidance that it wants to lower its bad loan ratio to 1.5% in the next two years and shift their focus to the individual and small business segment. By 2020, the firm wants to achieve a 60% share of retail loans in its overall book and grow the SME portfolio by 25%. By focusing on these two groups, where the bank is already showing strong momentum, analysts are anticipating that they tap another area of revenue and improve net-interest margins (NIMs). It is also one of the cheaper picks in the sector.
HDFC also performed strongly after a solid earnings result reporting a record 39% jump in net profit; up 20% after adjusting for one-time transactions and exceptional, despite an increase in provisioning. A Reuters poll had estimated profit to rise by 20%. The bank has managed to navigate the more challenging macro environment better than its competitors with net interest margin remaining flat at 4.3% and asset quality largely stable. HDFC has also placed a priority in growing its retail book which saw a 19% increase y/y in Q4 and appears to be gaining market share from smaller finance institutions and NBFCs. The company also increased its dividend for the full year to Rs 20 per share vs. Rs 18 for the previous year.
Investors have benefited from the better news flow on the economy and from corporate earnings over the last month with the next catalyst for the market the election results from the southern Indian state of Karnataka. The latest exit polls which were released on Saturday are mixed with different news organizations speculating that the Congress Party would maintain power, others predicting that Prime Minister Modi’s BJP will get a majority with others anticipating what was indicated in pre-elections surveys - a hung Assembly with the Congress and the BJP tied and the Janata Dal (Secular) JD(S) emerging as key to forming a government.
The Prime Minister was hoping for a strong showing this weekend to help boost his chances of winning a second term in the general elections in 2019. Official ballot counting will commence on Monday.
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IND-X Advisors Limited