Banking sector earnings review: Who's leading Q1 race?

In an interview to CNBC-TV18 MB Mahesh, analyst, Kotak Institutional Equities shared his reading on the first quarter earnings of various private and public sector banks like ICICI Bank, Union Bank of India, HDFC Bank and Punjab National Bank.

He expects largest private sector lender ICICI Bank to continue to outperform in the near-term. "The bank has done well on the asset quality front at least over the last couple of quarters. They have a good capital adequacy ratio and that comfort is driving the stock upwards at this point in time," he elaborated. Meanwhile, largest public sector lender, State Bank of India (SBI) is seen reporting Rs 3,800 crore profit this quarter. "Given the management's commentary in recent past it looks like we are going to see a weak performance at least on the asset quality and restructured loans front." Below is the edited transcript of Mahesh's interview with CNBC-TV18. Q: It seems a lot of positive reactions coming in post ICICI numbers. Should that stock be rerated on the way up? A: To some extent, yes. The bank has done well on the asset quality front at least over the last couple of quarters. Importantly, ICICI Bank has gone through a phase of seeing a large slippages from the retail loans. In this intermediate time they have done reasonably well on the liability franchise. They have a good capital adequacy ratio and that comfort is driving the stock upwards at this point in time. Headwinds remains – they do have a reasonably large exposure in the infrastructure side, some of the problem which could emerge in about a year or so from now. This stock is reasonably well positioned in the near term. Q: You do not see ICICI Bank closing the valuation gap with HDFC Bank to a limited extent over the next few quarters despite strong performance? A: I do not think that would be possible because HDFC Bank has a strong retail asset book. The underlying risks there are substantially lower than what ICICI Bank has. The overhang on ICICI Bank’s infrastructure portfolio or the overall corporate book will remain and so the discount at which it is trading right now that will hold good. Q: What did you make of Union Bank of India? It seemed last quarter that they had put the worst of their worries behind them but this quarter the wounds have opened up again? A: The Union Bank of India numbers for this quarter was very disappointing. The big risk came from large slippages they reported. The slippages reported were about Rs 1,600 crore of which nearly Rs 1,000 crore came from about 9-10 large accounts. That is becoming a little bit of an issue because they reported two very strong quarters of performance and that has not flown through in the current quarter. Some of the PSU banks especially, the mid-tier PSU banks you will run this risk wherein they have large chunky corporate loan portfolios in the books. You will see few quarters of fairly exceptional performance where either the slippages are low, recoveries are good. You would come back and see a couple of quarters of very poor performance because they tend to be very lumpy in nature. So, this quarter it has been on a negative side, almost every operating matrix that the bank reported this quarter was very poor. _PAGEBREAK_ Q: Did Punjab National Bank (PNB) disappoint you as well or there were some positives that you took away in terms of recoveries from PNB? A: Given the fact that Punjab National Bank reported very large slippages in the previous quarter one would have expected some amount of recoveries. The bank has done a reasonably good job there close to about Rs 1,500 crore of recoveries or upgradation. One important thing that we noticed in PNB is that there is some shift in management focus going forward from balance sheet growth towards improving the asset quality of the balance sheet. That focus coming back is the biggest positive that we would take away from the current result. On the slippage front the disappointing performance continues. It seems to be a bit more widespread than what Union Bank reported in their recent result. But the fact that they have shifted their focus from slippages to recoveries is probably the biggest positive that we will see in the current quarter’s result. Q: What are you expecting from Bank of Baroda today? A: On Bank of Baroda we are looking at a net profit of close to about Rs 950 crore. On earnings front there is a fair possibility that it could surprise positively. But the whole call will be on the restructured book or on the underlying slippages. The bank could kind of disappoint the entire street. The fact that they could report higher than expected slippages and restructuring would continue. I do not think anything different on Bank of Baroda’s book to what some of the other PSU banks have reported at least in the last week or so. So to that extent, it would be a little bit of a disappointing performance at least on the asset quality front, if not from the earnings side. Q: After looking at what the public sector space has reported the last one week, where would you peg expectations with State Bank of India (SBI)? A: For SBI we are looking at a profit of close to about Rs 3,800 crore for this quarter. It is lower than what the bank reported in the previous quarter. It is less on the earnings front because earnings could see some support from the treasury income side or from an investment depreciation write back. But if one look at the quarterly performance of some of SBI’s subsidiaries at least for this quarter, it is almost similar to any other PSU bank. Given the management commentary that we have seen in recent past it looks like you are going to see a weak performance at least on the asset quality front and also on the restructured loans front. So from a number perspective SBI could be strong given the fact that it’s coming out from a very low base. But on the asset quality front we do not see a big improvement at least for the current quarter. Inline with what PNB has reported SBI also seems to have focused mainly on the asset quality front especially over the last 5-6 quarters from now. It has been probably ahead of the curve as compared to most of the other public sector banks and that’s is the key positive in SBI’s numbers.