Positive on banking sector, like ICICI, Axis: Nomura India

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The banking sector, in a way, is a trend setter for the Indian indices as it has major weightage on the Nifty. Vijay Sarathi, banking analyst of Nomura India is positive on the sector and sees further upside. He expects 16-17% loan growth for the banking sector. According to him, higher provisioning by banks is largely priced in.

India's largest private sector lender ICICI Bank 's third quarter (Oct-Dec) net profit rose 20% year-on-year to Rs 1,728 crore on the back of robust loan growth.

Sarathi says, ICICI Bank provisions were lower than estimates. He says, improvement in the bank's RoEs will be taken positively by the market. He is positive on the bank.

He is also positive on Axis Bank .

SBI got a booster on Monday as government decided to infuse upto Rs 7,900 crore into the bank. Sarathi says, it will require further capital going forward.

Also read: ICICI Bank beats estimates, Q3 net up 20% to Rs 1,728 cr

Below is the edited transcript of his interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video.

Q: ICICI Bank, do you think that the price of Rs 900 adequately captures the positive numbers which came in this quarter?

A: It's been a fairly high quality quarter from the bank. Clearly, loan lost provisions, as per the guidance given by the management yesterday, we are relatively higher compared to that number. So that could drive some earnings upside.

We have not revised that estimates after the quarter yesterday. But clearly we see upsides from that quarter. More importantly, they have started to receive dividends from the life insurance subsidiary, which should start boosting their ROE, which should also be perceived positively by the market.

Q: This quarter most of the private banks have done quite well. Is it too early to breath easy on the concerns that characterised this sector last year? Everybody thought that the balance sheet would be a mess going into 2012. On the evidence of what you have seen in the current quarter, do you think you can take that call that may be the markets were over reacting in 2011?

A: I'll agree with that. Clearly, late last year the market wasn't sure what extent the problem was. So, when you don't know what you are dealing with, obviously the natural reaction is to price in the worst. That is what showed up in the valuation that we saw late last year.

Going forward, clearly it's too early for us to say that the current quarter's very benign loan lost provisions can be extended for the next several quarters. But having said that, if the RBI is clearly taking about monetary easing being on its phase, to that extent what could have been a potential bad loan need not be a bad loan problem.

In terms of our own estimate, we are looking at for a sector on an average loan lost provisions going from 70 bps to 120 bps over the next one and one-and-a-half year. And we believe most of this is priced in at the current levels.

Q: There was some disappointment from the public sector fraternity though on Punjab National Bank (PNB) yesterday, for example, the provision seemed much higher, the bottom-line was a bit disappointing as were the NPL figures. What did you make of those numbers?

A: We were cautious on PNB ahead of the quarter as well. The bank's profit numbers were pretty much in line with our estimates. So, to that extent, we were not surprised by that. But again we have seen a fairly diverse performance across the sector as far as loan lost provisions are concerned. So, the influences are clearly too early to paint the entire sector with one broad brush.

Also, the way there has been fairly benign performance too early to extend that performance. But having said that, clearly there is still value in this sector. Despite the near-term volatility, we are still positive on this sector.

Q: The kind of money provisions that SBI is getting now from the government some of your peers have suggested it's not going to be enough and at some point next year SBI is going to need to do some more fund raising. Do you have any thoughts on that?

A: The money that they are going to get from the government in this quarter is clearly not enough for their long-term growth needs. But even without the government's capital infusion, we expect the bank to have hit close 9% on tier 1 by end of March including the yearly profits.

In terms of our own expectations for loan growth, we are looking at 16-17% for the next year. SBI should have achieved that loan growth without any significant capital concerns. But more from a longer term perspective clearly SBI has to raise capital. That is also true for many other banks in our coverage as well.

Q: After looking at this quarter's numbers, in a relative sense, what would you have more comfort buying into, ICICI Bank or Axis Bank, given relative performance and valuations?

A: Actually, we like both. The reason I say that is while the perception on Axis have been much more negative than for ICICI, we are factoring in fairly high loan loss provisions for Axis Bank. Despite factoring those high loan lost provisions, we believe there is value in the stock at the current levels.

As far as ICICI is concerned, clearly third quarter makes us lot more upbeat on the stock versus way we were earlier to the quarter. From a longer term perspective, clearly the metric to watch for ICICI would be the traction in return of equity. So, if they actually manage to inch up for the 15% levels or higher, clearly there is a case for rerating of the price to book multiple compared to the levels which Axis would typically get in a good market.