Banking sector results preview for Q4FY12: PLilladher

Asset quality will continue to remain the focus area for banks in Q412 and accretion in restructured book for PSU banks (excl. SBI) would be much higher than initial expectations. Growth trends would remain muted for most banks with margins expected to contract marginally due to spike in short-term rates. Though CDR restructuring is on a rise, involvement of beta private sector banks (Axis/ICICI/Yes) is expected to be limited and hence, we maintain our relative preference for beta private banks over PSUs getting into Q4FY12. Our top picks are Yes Bank, ICICI, Axis and LICHF. BOI and Kotak are top avoids.

Wave of restructuring in Q4FY12: Reported asset quality will not be strong as reported in Q3FY12 as recoveries/upgrades from technical slippages in H1FY12 would down in Q4FY12. Though market has been factoring in increase in restructured book for PSU banks, we expect ~Rs50-70bn of accretion to restructured book in Q4FY12 itself (for each large PSU bank) with Air India, number of SEBs and other large ticket CDRs cases to be recognized in this quarter. Among PSUs, SBI will see least restructuring with very limited Air India and SEB exposure. We see limited participation of private banks to be very limited in restructuring and hence, asset quality could continue to surprise positively.

Growth muted, Margins to moderate: We expect ~4-4.5% growth in Q4FY12 which is muted, given the seasonal uptick seen in H2/Q4 and with rupee appreciating from December 2011 levels, growth reported in international book of banks will be muted. With spike in wholesale rates, we expect margins to moderate in 4Q12.

Overall, we expect ~16% PPOP growth and 13% YoY PAT growth for the sector. Performance of private sector banks across parameters (NII/PPOP/PAT) will be strong at ~17-20% growth, whereas we expect ~7% YoY PAT growth for PSUs (excl. SBI). Given fixed rate book, we expect margin performance to remain muted for NBFCs in Q4FY12, including LICHF.

Key results: (1) ICICI Bank: We see ~Rs15bn of restructuring which is expected and hence, asset quality would be comfortable. However, weakness in core fees and loan growth is likely to continue. (2) SBI: Reported NPA performance will continue to remain muted (Rs45bn of net accretion). However, restructuring will be significantly lower than most peer PSUs and any positive surprise on reported NPAs with low restructuring will be taken very positively. (3) LICHF: We expect a strong spread recovery in FY13 due to re-pricing but Q4FY12 margin performance could continue to disappoint - Recommend buying into the weakness.

Q4 Results Preview (Rs m)

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