In an interview to CNBC-TV18 Vishal Goyal, ED, Banks & Fin Research, UBS shared his outlook on the banking season and this expectations from the upcoming third quarter earnings season.
One can expect private banks to report higher restructuring in Q3FY14, while public sector lenders are guiding for slightly better asset quality performance, so it would be a mixed quarter for the sector, he said.
On asset quality front alone, small or midcap PSU banks would witness a slightly better quarter. From a structural story point of view, defensive names with retail exposures like HDFC Bank and IndusInd Bank would keep reporting good overall operating matrix, he added. Further, wholesale-funded banks are likely to see NIM pressure to the extent of 5-10 bps, he said.
HDFC Bank and IndusInd Bank are the broking firm’s top bets from this space.
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Below is the edited transcript of Vishal Goyal’s interview with CNBC-TV18
Q: How would you approach banks as we head into earning season? We have seen fair bit of correction in stocks like ICICI Bank about 10-12 percent.
A: This earning season is pretty interesting because we are seeing some divergent trends especially in terms of asset quality. While so far we have seen PSU banks reporting worse asset quality, the private peers are now catching up. We would see more restructuring flow coming for even the private banks especially the corporate banks. Therefore we are seeing some amount of underperformance from them. Most of the PSU banks are guiding for slightly better asset quality number at this particular time. So overall it will be a mixed quarter.
Q: Within the private space which are the banks that you would expect incrementally better earnings from and incrementally worse earnings from on a sequential basis?
A: Retail banks are still holding up on the matrix and without any significant deterioration in their asset quality. While corporate banks are seeing all kinds of pressure both on asset quality and operating matrix which is fee, credit growth etc. Those are the two groups which we all know within private banks and therefore there is divergence in their performance as well.
Q: For the PSU banks last couple of quarters there was some silver lining in terms of asset quality or some stability over there. Do you think that will continue in this quarter or could there be some shocks along the way?
A: For PSU banks, we would see something similar in this quarter as well, partly may be because of the base they are seeing better asset quality on a sequential basis. As a group, should see PSU banks reporting better numbers than previous quarter especially on the NPL formation and the restructured loans.
Q: What about banks that have higher wholesale funding for example the likes of IndusInd Bank as well as Yes Bank which were expected to be very pressured in terms of their net interest margins in the previous quarter. Will there be any pressure on their NIMs this quarter?
A: There should be slight pressure. If we look at the six months wholesale rates they have definitely softened a lot compared to last quarter. But still we are seeing upward reprising of the existing book. There should be some pressure but not significant, I expect it to be be a 5-10 bps.
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Q: What about the bond portfolios, are you expecting any sort of worsening in the bond portfolios from the previous quarter or do you expect the losses to be stemmed this quarter?
A: There are two categories within bond losses. One is incremental bond losses which would not be significant because bond yields have moved from 8.8 percent to 8.9 percent, so there is only 5-10 bps increase there. So, there are no significant fresh bond losses. In fact you could see some reversals on the corporate bond book for the banks that have corporate bond exposures.
On the other hand, if you talk about banks who amortize their bond losses in Q2, they don't get any relief. While they were expecting 8.8 percent coming down to may be 8-8.5 percent, that has not happened. So there amortization hit will still be there in this particular quarter.
Q: Overall if you had to place your bets within the private or the public space in terms of PSU or private banks, which one do you think will have a better quarter this earning season?
A: On asset quality front alone, small or midcap PSU banks would have slightly better quarter. From a structural story point of view, defensive names with retail exposures like HDFC bank and Indus Ind Bank are our top picks – would keep reporting good operating matrix overall.
Q: What about something like IDFC?
A: IDFC has been slowing down on the growth. Their growth would be clearly weaker than what they have been reporting earlier.
Q: Besides IDFC what would your call be on other Non-bank financial companies (NBFCs)?
A: Most of the NBFCs some are CV financing, some are mortgage financiers. Mortgage financiers don't have any problem of asset quality. They have been struggling with either margin or growth but, on margins and growth both are stable in this particular quarter, the growth is in line with the trend growth. For the other CV and auto financials we are seeing some pressure both on disbursements and asset quality.
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