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Last Updated : Nov 28, 2011 03:36 PM IST | Source: Moneycontrol.com

Positive on Syndicate Bank, ICICI Bank, Axis Bank: Angel

Angel Broking has come out with its report on banking & financial space. The research firm prefers Axis Bank and ICICI Bank from a valuation perspective.

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Angel Broking has come out with its report on banking & financial space. The research firm prefers Axis Bank and ICICI Bank from a valuation perspective.

Margins improve on aggressive pass through of rate hikes: During 2QFY2012, earnings growth for the banking sector was aided by sequential margin expansion for almost all banks, which offsetted asset-quality pressures. The banking industry has been swift in passing on the rate hikes by the RBI though hikes in lending rates over the last six months. Also, the lesser aggressive stance adopted by bigger established players such as SBI and ICICI Bank in terms of credit growth and with HDFC Bank in any case focusing on profitable growth rather than just market share (all three have a combined market share of ~30% of the systems credit) have given leeway to other smaller banks as well to price their loans. Reflecting this, the reported margin for our coverage universe improved by ~15bp qoq during 2QFY2012.

Asset quality deteriorates; some PSU banks buck the trend: While most PSU banks witnessed asset-quality stress and reported higher slippages in 2QFY2012, primarily on account of completion of transition to system-based NPA recognition, some banks managed to buck the trend by maintaining or sequentially improving their asset quality. Notably, banks that had already switched over to system-based NPA recognition before the mandated timeline of September 30, 2011, such as BOB, BOM, J&KBK and Vijaya Bank, witnessed an improvement in their NPA ratios in 2QFY2012 compared to 1QFY2012. Apart from slippages arising due to the switchover to system-based NPA recognition, delinquencies from the SME and agri books further aggravated asset-quality pressures and led to higher provisioning expenses for most banks during 2QFY2012. With interest rates expected to remain high until the onset of FY2013 and sectors such as infra, real estate and exports continuing to face macro headwinds, asset-quality concerns are expected to linger. However, that said, incremental provisioning expenses in FY2011 and FY2012 by banks on account of switchover to system-based NPA recognition and to meet the increase in NPA prudential norms and the mandated provision coverage ratio of 70% have led to a high base. Hence, the percentage increase in actual provisioning expenses in the P&L is not expected to increase significantly, even though genuine slippages are expected to increase going forward.

Outlook and valuation: In light of the macro environment, we prefer banks with a more conservative asset-quality profile, especially amongst mid caps (for instance, relatively lower yield on advances and moderate credit growth)- this includes banks such as Syndicate Bank and Bank of Maharashtra. Also, from a medium-term perspective, we continue to prefer large private banks with a strong structural investment case- within which we prefer Axis Bank and ICICI Bank from a valuation perspective.

Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

To read the full report click on the attachment

First Published on Nov 28, 2011 03:21 pm