Angel Broking has come out with its June quarterly earning estimates for banking sector. The research firm expects margins to come under pressure in 1HFY2013.
Banking stocks remain under pressure: Banking stocks remained under pressure in 1QFY2013, with 19 out of 27 banks under our coverage reporting negative returns sequentially. The economic growth environment has deteriorated further; however, persistent inflation levels have restrained the RBI from undertaking aggressive rate cuts, weighing heavily on banking stocks. The RBI's OMOs have negated short-term liquidity pressures, leading to easier and cheaper access to funds at the shorter end of the interest rate curve; however, weak deposit growth has kept cost of funds elevated at the longer end. On a yoy basis, the bottom-line performance is expected to be strong at just below 30% levels, driven by strong growth at the operating front and low base effect in case of SBI. However, disecting this into sub-groups, large private banks (28.2% yoy) and SBI (129.8% yoy) are expected to outperform large PSUs excluding SBI (18.3% yoy) and mid PSU banks (0.1% yoy) comfortably. Credit and deposit growth outlook remains challenging: For FY2012, credit growth for the banking sector was moderate; however, deposit mobilization remained weak. Inspite of interest rates having remained elevated for quite some time now, credit growth as of June 15, 2012, held up reasonably well at 18.3% yoy, while deposit growth stood significantly lower at 14.3% yoy. Overall, the credit growth outlook is challenging for FY2013; however, a 50bp repo rate cut by the RBI and further rate cuts over FY2013, though estimated at only 50-75bp, should aid in reviving investment activities to some extent. Real interest rates for depositors remain negative (considering CPI inflation levels of ~10%) and are likely to keep deposit growth subdued. Normal monsoon levels and declining global commodity prices though, in our view, could result in marked lower inflation levels going ahead and result in higher savings and deposit mobilization. Margins expected to come under pressure in 1HFY2013: Most banks, post the 50bp repo cut in the second fortnight of April, had simultaneously reduced their base rates by 25bp (in some cases spreads over base rates have also been decreased) and deposit rates by 25-50bp. Negative real interest rates (considering CPI of ~10%) are expected to keep deposit growth subdued and likely to limit the banking sector's ability to further reduce deposit rates, particularly in case of banks having a higher loan-to-deposit ratio, leading to short-term margin contractions. Outlook and valuation: Considering the sharp decline in banking stocks post the run-up in the first three months of CY2012, the banking sector's valuations have again become attractive. Even structurally stronger banks and those having a cyclically better asset-quality profile and strong earnings trajectory are available at cheap valuations in our view and, hence, we retain them as our top picks- viz., Axis Bank and ICICI Bank amongst large private banks, Yes Bank amongst mid-size banks (an alpha stock in our view) and SBI and BOB amongst large PSU banks. We also recommend Buy on PNB, post the sharp correction in the stock, which we believe provides adequate margin of safety from asset quality concerns. Among other banks, we believe valuations of few banks, such as Andhra Bank, UCO Bank, Central Bank, Indian Bank, Allahabad Bank and Vijaya Bank, still do not provide adequate margin of safety from asset-quality risks, warranting a switch in our view to Union Bank, Syndicate Bank, and United Bank, which have a superior earnings quality outlook and cheaper valuations.| Company | Operating Income | Net Profit | Reco | ||
| 1QFY13E | % chg | 1QFY13E | % chg | ||
| Axis Bank | 3,622 | 25.3 | 1,135 | 20.4 | Buy |
| Federal Bank | 639 | 10.8 | 193 | 31.9 | Neutral |
| HDFC Bank | 4,916 | 23.9 | 1,413 | 30.2 | Neutral |
| ICICI Bank | 5,131 | 26.6 | 1,759 | 32 | Buy |
| SIB | 348 | 35.5 | 105 | 27.2 | Neutral |
| YES Bank | 695 | 33.7 | 265 | 22.5 | Buy |
| Allahabad Bank | 1,675 | 14.6 | 403 | -3.6 | Neutral |
| Andhra Bank | 1,170 | 3.8 | 294 | -23.8 | Reduce |
| BOB | 3,690 | 25.6 | 1,118 | 8.3 | Buy |
| BOI | 3,252 | 30 | 783 | 51.3 | Accum. |
| BOM | 819 | 7.1 | 140 | 14.3 | Accum. |
| Canara Bank | 2,811 | 21.2 | 817 | 12.5 | Buy |
| Central Bank | 1,611 | -0.1 | 205 | -26.9 | Reduce |
| Corporation Bank | 1,206 | 20.9 | 353 | 0.6 | Accum. |
| Dena Bank | 748 | 31 | 180 | 7 | Accum. |
| IDBI | 1,786 | 12.8 | 526 | 56.9 | Buy |
| IndusInd Bank | 1,436 | 12.2 | 401 | -1.5 | Neutral |
| IOB | 1,787 | 17.1 | 327 | 59 | Accum. |
| J&K Bank | 604 | 19.9 | 216 | 18.3 | Neutral |
| OBC | 1,435 | 6.9 | 294 | -17.2 | Accum. |
| PNB | 4,512 | 7.5 | 1,174 | 6.3 | Buy |
| SBI | 15,880 | 20 | 3,638 | 129.8 | Accum. |
| Syndicate Bank | 1,651 | 17.8 | 311 | -9.3 | Accum. |
| UCO Bank | 1,306 | 20.5 | 323 | 10.3 | Reduce |
| Union Bank | 2,449 | 18.1 | 529 | 14 | Buy |
| United Bank | 796 | 7.7 | 143 | 8.2 | Buy |
| Vijaya Bank | 629 | 6.3 | 129 | 79 | Reduce |
| HDFC | 1,568 | 20 | 1,013 | 19.9 | Neutral |
| LIC Housing Fin | 453 | 7.7 | 278 | 8.4 | Accum. |
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