Q2 preview: Angel on how bank earnings are stacking up

In an interview to CNBC-TV18, Vaibhav Agrawal of Angel Broking analysed Axis Bank second quarter results. He also gave a preview of the other numbers expected this week.

Axis Bank managed to keep gross and net NPAs in check with a very minor increase, so one can buy this stock current level, suggests Agrawal. "We maintain a buy with around an 18 percent upside from these levels. The trend for Axis Bank remains better than what the market is constantly expecting." Meanwhile, ICICI Bank is likely to post good numbers both on operating and earnings front. "On the operating income, they are being aided by the rupee depreciation as well, so 25 percent growth is expected," he added. The broking firm has accumulate rating on Punjab National Bank and expects Bank of Baroda to perform better than peers on earnings and asset quality. Below is the edited transcript of Agrawal’s interview with CNBC-TV18. Q: What is your take on Axis Bank? It is not a great growth story but is it just a cleaner balance sheet, a stabilizing balance sheet story? A: That was the positive from their results, the bottom-line did come in line with estimates. They had good treasury gains, which they used to create higher provisions. As a result of which, the net NPAs were much better than what we were building in. That was the clear positive from the results. Q: How exactly did you read the asset quality for Axis Bank this time around? There was a significant improvement on a sequential basis? A: The market expectations for Axis Bank have been quite bearish. There are expectations of anywhere between Rs 1,200-1,500 crore increase in gross NPAs for these nine months. But out of that, in this quarter, they have literally managed to keep gross and net NPAs in check with a very minor increase. In that sense, the asset quality came in better than expected. We still have to wait and watch some chunky corporate accounts may come in on the next quarter. But overall, the trend for Axis Bank remains better than what the market is constantly expecting. Q: What are you penciling in in terms of an asset quality or total restructured book by the end of FY14? There were numbers doing the rounds before the results came in of even 7500 by FY14. Do you think things get as bad as that or are those fears exaggerated? A: We do believe that fears on Axis Bank are exaggerated not just for the last quarter or two, but for several numbers of quarters. There are some known accounts for the bank which will become NPA but it would be wrong to extrapolate that into a larger concern. For our own estimates, on gross NPAs, we are still penciling in around Rs 400-500 crore net slippage for the next two quarters as well. If they reach those levels, it should be good enough set of numbers. _PAGEBREAK_ Q: How are you looking at Axis, do you have a buy on it? What are you forecasting in terms of earnings or price to book where you would be comfortable? A: Even after the slight slowdown in their earnings growth off late, their ROEs remain amongst the best in the sector, they are on par with other smaller banks like IndusInd. But the stock is trading almost 50 percent cheaper than stocks like IndusInd and HDFC Bank, so it is a good buy at these levels. We maintain a buy with around an 18 percent upside from these levels. Q: What about the remaining part of the private banking space say something like a Kotak Mahindra what are you expecting in terms of results next week from them and ICICI Bank in terms of asset quality? A: ICICI Bank will continue to give good numbers both on operating and earnings front. On the operating income, they are being aided by the rupee depreciation as well, so 25 percent growth is expected. As far as asset quality is concerned, in line with other private sector banks they have been quite healthy in that area. A decent 25 percent kind of earnings growth is expected. Q: One of the shocker numbers that we have been getting several quarters has been Punjab National Bank (PNB). Do you think the biggest of restructuring is over now? Is PNB turning the corner at least the market price trend seems to indicate that? A: PNB has already seen a lot of pain, so it is not that we are factoring in a decline in absolute terms even going forward. Somewhere we do expect the numbers not to get worse from where they have been in the last quarter or two. The price had corrected significantly, so it was a good value buy because at the end of the day structurally, it has a very strong legacy. Q: What would your other buys in the public sector space be? What about Bank of Baroda (BoB), best in class for sometime now? A: On PNB we don’t have a buy right now because the stock has already bounced back. We have an accumulate rating with around 10 percent upside. After the sharp run up in all the PSU banks right now we have just about a 5 percent kind of upside on BoB. But fundamentally at least for this quarter as well it should do better than peers on earnings and asset quality.