1Q11 profits were up 30% yoy well above our 20% est) and pre-provisioning profits ex-trading gains grew at a robust 70% yoy. Qualitatively, it was a strong all-round show with better NIMs, fees and costs. While asset quality deterioration remains high (but stable), it was overshadowed by improving overall macro health and a strong operational performance.
Earnings momentum accelerated in 1Q, helped by a combination of higher NIMs (328bps, +4bps qoq), improvement in fee income (+20% yoy) and modest operating expenses (+9% yoy). These were partially offset by a) lower trading gains and b) high (but stable) credit costs. We believe pressures on funding costs are rising (most banks upped deposit rates recently) and will cap NIMs. A strong quarter, but likely a tough one to repeat.
Balance sheet looks good for the most part – there is growth (and capital to maintain it for now) and asset quality pressures appear to be manageable. The key concern – funding growth – has meaningfully lagged credit growth and can constrain growth/margins hereon.
Government banks performed better than private ones on: a) Net profits (+33% vs. 25%); b) Loan growth (+24% vs. 20%); c) NIMs (up 17bps qoq vs. down 25bps for private); and d) Fee income growth (+22% vs. 17%). We believe, PSU banks have been more aggressive on growth, will probably show up in tightening balance sheet liquidity, lower NIMs and lower trading gains. In sum 1Q is a likely peak with tighter rates/liquidity moderating further gains.
