Dena Bank, BOB, BOI, PNB report strong growth in Q1FY13

The overall banking result for Q1FY13 was an extension of the problems which the entire banking universe had witnessed in Q4FY12. The banks were hurt by high inflationary pressure, weak demand, global slowdown, continued margin pressure, high interest rates and worsening asset quality. With continuous slowdown in economy and increasing worries about asset quality overall profitability of the banks are likely to remain under pressure in the near term.

This quarter was no exception to the fact that the private banks once again outpaced the PSU banks in terms of performance on all fronts, be it asset quality, business growth, core performance or profitability. The PSU banks continued to bear the brunt of asset quality concerns which has shown no signs of respite. SBI lead the pack with poor performance on asset quality front which suggests that near term outlook continues to be challenging for the entire PSU pack. Despite the problems engraved in the banking sector, some banks did report good results on operational basis:

• ICICI Bank
• Yes Bank
• Indusind Bank
• Dena Bank
• DCB
• ING Vysya Bank
• OBC
• Syndicate bank
• Kotak Mahindra Bank
• City Union Bank

Net Interest Margins: Compresses in line with expectations:

The entire banking industry witnessed a compression in NIMs in Q1FY13 on expected lines. Pressure was seen on the cost of funds side primarily due to decline in CASA ratio and higher rate on retail term deposit. Moreover, high proportion of bulk deposits also led to significant increase in the cost of funds. Almost all the banks witnessed an increase in the cost of deposits. On the yield side, CRR cut did provide some respite however it was almost negated by the reduction in the base rate by the banks following the suit of RBI policy action. Moreover, many of the PSU banks have reported interest income reversal which also led to decline in NIMs on sequential basis.  NIM compression was more visible in the PSU banks as compared to Private banks. Amongst, Private sector banks almost all the banks reported YoY improvement. However, Federal Bank, Indusind Bank reported decline in margins on YoY basis. Yes Bank margin was stable on YoY and sequential basis.

Loan growth: Seasonal impact leads to growth moderation:

Amongst PSU Bank’s, Dena Bank, BOB, BOI and PNB reported strong growth above industry; while Canara Bank, Andhra Bank reported dismal growth on YoY basis. Most of the PSU banks which witnessed substantial increase in loan book owing to benefit of rupee depreciation effect in their international book were BOB, BOI and SBI.

In case of private banks, Axis Bank , HDFC Bank , ING Vysya, DCB, City Union Bank, Kotak and Indusind Bank outperformed the industry growth and witnessed significant growth. However, Federal Bank, Yes Bank reported a moderate growth as compared to industry growth. In case of Yes Bank including credit substitute’s growth was higher.

Growth in deposits remained subdued for the entire banking industry. PSU Bank’s like BOB, UCO Bank, PNB, Dena Bank reported strong growth during the quarter. Indusind Bank, Axis Bank, HDFC Bank, City union Bank reported good growth amongst private sector banks on YoY basis. Sequentially, strong growth was seen in Kotak, DCB, Indusind Bank and ICICI Bank.

Asset Quality: Continuous pressure seen:

Deterioration in asset quality continued during Q1FY13 majorly for the PSU bank owing to higher slippages and restructuring. However some of the banks strived to achieve higher recovery and upgradation which showed some positive results. Gross NPA figure increased for most of the banks sequentially be it private sector banks or PSU banks barring an exception of a few. However, in terms of extent of deterioration in asset quality, private banks were once again better as compared to PSU banks. Banks like DCB, Indian Bank, OBC and Syndicate Bank reported decline in Gross NPA sequentially.

However, the quarter witnessed significant slippages in case of most of the banks. SBI witnessed the highest slippage in Q1FY13 which reached to the level of Rs 10,844 cr. Union Bank, Canara Bank, Bank of India, IDBI, PNB; Central Bank of India witnessed slippage to the highest level. However, some banks like Allahabad Bank, Dena Bank, IOB, ING Vysya Bank, CUB, OBC ICICI Bank witnessed lower slippages during the quarter.

Going forward: What needs to be watched out for:

While banks have been hurt by restructuring bulk of the stressed assets we believe near term scope for improvement is very less. The banking sector on a whole continues to be haunted with lots of problems and no immediate solution is being seen which can provide a respite in the near term. 

However, based on our overall study of the various parameters and the revised valuations we can conclude that there are some stocks which have shown some resilience to the current macro-economic scenario; though not completely restrained from it.

We believe issues related to asset quality will continue to remain over-hang for next couple of quarters coupled with slowing credit demand and decline in margin. The overall trend of slippages will be the key parameter to watch out for in near term. We believe that in such a scenario the stocks which have shown consistent performance over the last few quarters on most of the parameters and are attractively valued should be selected. 

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