Banking Q2: UBS Securities' preview, review and picks

Private sector banks like Axis Bank, Yes Bank and ICICI Bank have declared their second quarter results. In an interview to CNBC-TV18, Vishal Goyal, executive director of UBS Securities says the numbers were good "After taking Deccan NPL, their asset quality was fairly stable. That was a positive surprise for me," he adds.

State Bank of India is yet to declare its second quarter results. Goyal is not expecting a huge relief on asset quality for SBI. Among the largecaps, he likes ICICI Bank. “We also like Yes Bank, Federal Bank and IndusInd,” he asserts. He prefers private sector banks. “Private banks’ valuations are pretty close to historical average versus PSU banks,” he adds. Q2FY13 Results: How ICICI, Axis and HDFC Bank numbers stack up Below is the edited transcript of his interview with CNBC-TV18's Udayan Mukherjee and Sonia Shenoy. Q: The results from the PSU banks have been very disparate, some good, some quite bad. What are you expecting from SBI? A: I think if you look at the results, PNB and SBI’s last quarter results, I am not expecting a huge relief on asset quality for them. Last quarter, they added around Rs 11,000 crore of NPAs and around Rs 500 crore of restructuring. I think this quarter they should be doing something similar, maybe around Rs 11,000-11,500 crore NPA and restructuring put together. The reforms, which we have discussed in the last one or two months, have not touched the ground yet. So, I do not think SME and mid-corp pain is going anywhere. Also, if I look at the PNB agriculture NPA, which was around 10 percent, it clearly worries me even for SBI. Q: Do you think there is more pain ahead for PNB? A: PNB has been very aggressive in lending. Second, if you look at the stress sector for them, they have been into almost all the stress sectors possible in India. Thirdly, I think the management commentary is still not very convincing. I think they are still not looking to show any improvement in asset quality. This quarter looks like kind of peak. I do not think they will improve drastically. But 6 percent gross NPL addition looks like peak. So, it should gradually improve. But unless you see a revival in the economy, I do not think they will improve a lot. Q: Were the OBC numbers a little bit more encouraging for you? A: OBC was actually good. OBC Q1 was also good. On top of that, in Q2, they reported pretty good numbers. Their NPL addition was pretty flattish. That was really encouraging. After OBC’s results, I thought that there is a turn in PSU cycle. But I think after PNB results, you can be very sure of that. _PAGEBREAK_ Q: Where does that leave Bank of India where again things are difficult to predict? Are you expecting to see the PNB like pain or more along the lines of an OBC? A: If you look at Bank of India’s last six or eight quarters, they have been disappointing every alternate quarter. Your last quarter was bad. I am really not sure if this quarter will be good or bad. Last quarter, they already saw huge NPA increase, huge restructuring. So, this quarter they may have slightly better numbers, but I think Bank of India will be a volatile one. Q: Which was the best private sector bank number that you saw this quarter? A: I think Axis, Yes Bank and ICICI Bank were good. After taking Deccan NPL, their asset quality was fairly stable. That was a positive surprise for me. So, all these three corporate banks, where most of the asset quality risk is, I think they have reported pretty stable numbers, especially on asset quality; even Federal Bank among the smaller ones. Q: Which is your top pick in that space? A: Among the largecaps, we like ICICI a lot. We also like Yes Bank, Federal Bank and IndusInd. So, overall, we prefer private basket even for a recovery. Almost 30 percent of the PSU bank net worth is eroded by net NPAs and even if you assume 15-20 percent loss on restructured loans. If I adjust these two stresses, the private banks’ valuations are pretty close to historical average versus the PSU banks. Q: What did you like among the NBFC numbers the most this time? A: IDFC reported this Saturday, approvals were really down like 70 percent quarter-on-quarter and 70 percent year-on-year. So, we will have to see whether this is sustainable or with improvement maybe in sentiment they could see improvement in approvals. So, there is a shrinkage of pipeline.