Banking sector: Nomura's Q2 results preview; top picks

In October, all listed companies will declare their results for the quarter ending September 30, 2012.

In an interview to CNBC-TV18, Vijay Sarathi, banking analyst at Nomura India says for PSU banks incremental delinquencies will be at the same levels where they were in Q1 of FY13.

He thinks there should be very little room for disappointment on ICICI Bank. “We have been very positive on ICICI Bank for about two months now, one-and-a-half months. Second pick would be Axis Bank. We just upgraded IndusInd numbers this morning, we like the stock at the current levels,” he adds.

Q2 results: What to expect from banks

Below is the edited transcript of his interview with CNBC-TV18's Udayan Mukherjee.

Q: Will we see a significant rise in non-performing assets (NPAs) for the public sector banking space this quarter?

A: In our forecast, we expect incremental delinquencies to be at the same levels where they were in Q1 of FY13. So, to that extent, we do not see further deterioration. But I think there is no reason to be optimistic about those levels falling off dramatically as well because I think situation on the ground still remains quite negative.

Q: The public sector banks, which you cover actively, do you think that the situation might be worse than it was in the previous quarter?

A: If you take the names like State Bank of India (SBI), Bank of Baroda (BoB), Punjab National Bank (PNB), which are the large three that we cover, I think Q1 was quite bad for them in terms of incremental delinquencies. So, compared to those levels, yes, we do not see a further significant deterioration.

Q: Do you think that the results will support the recent rally that we have seen in the PSU banking stocks or is there room for disappointment?

A: Given the run up, I would think these stocks should be susceptible for any negative news that we see. For example, if you look at SBI, they had Rs 10,800 crore of slippages in Q1. I think we are looking at something like Rs 7,000 crore in incremental delinquencies. Anything worse than that should definitely lead to a correction.

Q: What about the private sector banks?

A: We are seeing upwards of 20 percent profit after tax (PAT) growth for the large private sector banks. IndusInd has done exceedingly well on that counter as well. They had about almost 30 percent growth. So, on an average, I think we do not expect asset quality problems to be as worse for the private sector banks as compared to the PSU banks.

Q: Which of the big names, between ICICI Bank and Axis Bank, do you expect to see better numbers from this time in terms of core business growth?

A: In terms of core business growth, I think ICICI Bank should do well. For Axis Bank, we would think their loan loss provision should be higher compared to ICICI Bank. So, on an average, I think there should be very little room for disappointment on ICICI Bank.

Q: What are your top buys in the private sector banking space now?

A: We have been very positive on ICICI Bank for about two months now, one-and-a-half months. Second pick would be Axis Bank. We just upgraded IndusInd numbers this morning, we like the stock at the current levels.