Angel Broking has come with its September`12 quarterly earning estimates for banking sector. According to the research firm banking stocks remained under stress on increased asset quality concerns.
Banking stocks remained under stress during 2QFY2013 on increased asset quality concerns. However, on a sequential basis, the recent liquidity driven rally aided 15 out of the 27 banking stocks under our coverage to end the quarter with positive returns. The economic growth environment has remained challenging; however, persistent inflation levels have restrained the RBI from undertaking a policy rate cut, which also weighed on banking stocks. Short-term liquidity improved aided by open market operations (OMOs) and a cut in the CRR, leading to easier and cheaper access to funds at the shorter end of the interest rate curve. Even at the longer end of the yield curve, cost of deposits is expected to ease as modest deposit mobilization amid weak incremental credit growth has allowed banks to reduce deposit rates.
On a yoy basis, the bottom-line performance is expected to be healthy at 21% levels, driven by strong growth on the operating front for private banks. However, dissecting the coverage universe into outperform large public sector (PSU) banks excluding SBI (14.1% yoy) and mid PSU banks (14.5% yoy) comfortably.
Deposit and Credit growth remain moderate:
The credit growth for the banking system as of September 7, 2012 stood at a moderate 16.5% yoy, however comparing on an incremental basis, the FY2013 YTD net credit off-take (fresh credit minus repayments) has been only ~`45,000cr compared to ~`1.33lakh cr over the same period in the last year (ie net credit off-take is lower by 66.1% on an yoy basis). A challenging economic growth environment resulted in weak incremental credit growth. Even the pipeline for banks, as indicated by their managements, remains thin, largely comprising of existing sanctions and accordingly in our view, credit growth by the year end could fall even lower to 14-15%.
Deposit growth, on the other hand, has also been low (14.4% yoy growth as of September 7, 2012), however comparing on an incremental basis, the FY2013 YTD incremental deposit mobilization stands at comfortable `4.1lakh cr compared to ~`3.2lakh cr over the same period in the last year. Going ahead, deposit growth is likely to remain moderate as real interest rates for depositors continue to remain negative (considering CPI inflation levels of ~10%). The recent diesel and LPG price revisions, proposed hike in electricity tariffs, impact of elevated global commodity prices, agricultural bottlenecks and increase in MSP are yet to reflect in generalized inflation and therefore pose significant upside risks to overall inflation expectation and resultant threat to savings and deposit mobilization.
Outlook and valuation: Recent corrective fiscal consolidation measures and other reformatory announcements coupled with expected reforms across sectors including mining and power would likely aid improvement in the investment climate. However, the outlook for economic growth improving and investment cycle picking up, rests purely on catalysts such as inflation and interest rates. The downward interest rate movement going by inflation levels currently is expected to be slower than anticipated earlier. In fact, inflation levels have the potential to inch up further from the current levels thus certainly delaying the start of the downward interest rate cycle. The slippages which started off from particular stressed sectors of the economy such as real estate, airlines and textiles have now become more broad-based in nature.
Private banks, having structurally stronger balance sheet and cyclically better asset-quality profile, remain our preferred segment choice with Yes Bank, Axis Bank and ICICI Bank being our top picks. Even the recent significant correction in the wholesale interest rates over the last few months is expected to benefit banks such as Yes Bank. While the entire PSU segment is relatively more burdened with asset quality concerns, few banks such as Punjab National Bank and Union Bank, after the recent run up in their stock prices, are still available near their 8-year low valuations and hence provide a case for accumulation from an 18-24 month perspective. Among other banks, we believe valuations of most mid-size PSU banks still do not provide adequate margin of safety from asset-quality risks, warranting a switch to Syndicate Bank and United Bank, which have a relatively better asset quality outlook and cheaper valuations.
|Company||Operating Income||Net Profit||Reco|
|2QFY13E ||% chg||2QFY13E ||% chg|
|LIC Housing Fin||431||10.1||248||152.2||Accum|