Banking Stocks results preview for Q3FY12: KRChoksey

The December quarter is likely to deliver ~ 8.2% y-o-y and 7.0% q-o-q growth of KRChoksey BFSI Universe. Private sector banks continue to show healthy operating performance with earnings expectation of 21.3% y-o-y and 11.8% q-o-q. HDFC Bank, Kotak Mahindra Bank and IndusInd Bank will outpace private sector banks’ aggregate growth. While PSU banks will report another muted operating performance largely attributable to slower balance sheet growth, weaker fee income growth and higher loan loss provisioning due to economy slowdown and higher exposure to problematic sectors such as infrastructure, power, and aviation and agricultural. We expect PSU banks to report 2.3% y-o-y and 5.5% q-o-q earnings growth mainly on account of muted performance of PNB, BoI and Union Bank of India. Most of the PSU banks migrated to system based NPA recognition in Q2FY12, which resulted into sharp spike in slippages in Q2FY12. We believe pace of NPA formation would slow down on sequential basis due to one off events in Q2FY12.

Healthy deposit growth and moderation in credit growth:

Non- food credit growth moderated from 19.5% on 7th Oct 2011 to 17.4% on 16th December 2011, Deposit growth has improved from 17.4% in Oct 2011 to 18.0% as on 16th December 2011. On YTD basis, deposits and credit grew 8.2% and 8.9% respectively with incremental YTD CD ratio stands at 70% as on 16th December 2011. We believe most of the banks would see improvement in their CD ratio in Q3FY12 due to sharp pick in credit growth from 7th Oct 2011 to 16th December 2011, which will aid to margins in Q3FY12. KRChoksey BFSI universe is expected to report 5.3% q-o-q credit growth and 4.6% q-o-q deposit growth. We expect retail loan, mid corporate and working capital finance continue to be key drivers for credit growth. Post the de-regulation of SB deposit rate, small pvt banks have increased SB rate from 4.0% to 6.0% which will result into relative better growth trajectory in saving deposits for small private sector banks.

Rate hike cycle is over; reversal to begin in six months:

During Q3FY12, the RBI hiked key policy rates- repo and reverse repo rates- by 25bps in order to tame inflationary pressures as core inflation continued above the RBI’s comfort zone. Inflation moderation outlook coupled with broad based economy slowdown will trigger rate easing cycle to begin which will have positive sentimental impact on BFSI stocks.

Factors to watch out for in the Q3FY12E results:

Drivers of credit growth and movement in sanction book.
Growth trends in SA deposits of large banks and small private sector banks post de-regulation of SB deposit rate.
Margin trends.
Core fee income growth trend especially in private sector banks.
Pace of NPA formation and corporate loan restructuring and corresponding loan loss provisioning; segmental asset quality trends especially power.
sector exposure (SEB & IPP), aviation, stress global linked SMEs etc.
Impact of rupee depreciation on overseas loan book.
Upgradation and cash recovery from written off accounts.
Margin trends of the banks after recent hike in lending and deposit rates.
Rising bond yields and equity market correction may result into mild MTM hit to earnings.

Valuation:

Bankex corrected 15.4% against 5.6% market correction on the back of heightened asset quality concerns, moderation in growth and increased stress in problematic sector such as power, aviation etc. Post this correction, valuation of the banking has become attractive with medium term investment perspective. We believe earnings downgrade to bottom out in near term and beginning of rate easing cycle is the key upside triggers for BFSI stocks. We continue to prefer private sector banks over PSU banks due to earning resilience, growth visibility and relatively better asset quality trends.

Top Picks:
ICICI Bank, Axis Bank, IndusInd Bank, IDFC and SBI.

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