Private banks may correct due to strong run-up: Kotak Instl

Private sector lender, IndusInd Bank will announce its third quarter earnings today. In a CNBC-TV18 poll, their net interest income is expected to rise 28 percent to Rs 550 crores, while profits may rise to Rs 272 crores. NIMs expected to expand this quarter.

MB Mahesh, analyst, Kotak Institutional Equities expects the bank to deliver strong numbers with earnings growth of over 25 percent for the current quarter. "From a price perspective, we expect a maximum upside of about 5-10 percent from the current levels," he said in an interview to CNBC-TV18. Meanwhile, public sector lenders are expected to see some slowdown in net addition of slippages. Further, he added that post the strong run- up seen in private banks a correction is likely. "We now need to see very strong performance asset quality to continue for most of these private banks. Also, the growth trajectory should remain at what it has been in the past. If that slips then a correction is likely. For most of these banks, we don’t see an upside of more than about 5-7 percent from current levels," he elaborated. Below is the edited transcript of MB Mahesh’s interview with CNBC-TV18 Q: What kind of expectations you have from IndusInd Bank and a price target as well? A: We expect the bank to report a fairly strong set of earnings. We are looking at over a 25 percent earnings growth for the current quarter. From an asset quality perspective, we expect fairly stable set of numbers. From a price perspective, we expect a maximum upside of about 5-10 percent from hereon. We will need to see the how the performance has been before we take a stronger call on the price objective of the stock. Q: That seems to be the prevalent mood in private sector banks where even people who are bullish seem to believe that the way prices have run up they are probably due for a correction. Do you agree with that point of view? A: I would think it is right because of the way price-to-book has expanded at least for the private sector banks in the last one year. We have reached a stage where we need to see a very strong performance on asset quality to continue for most of these banks. We also need to start seeing growth trajectory of the bank, continue to hold at what they have been reporting at least for the last 3-4 quarters. If that is going to slowdown then it is likely to see some level of correction from here onwards. For most of the banks, which we have from a price objective, we don’t see an upside of more than about 5-7 percent from current levels. We should see some level of correction from here onwards. Q: Do you see the earnings this time around for any of these banks like ICICI, Axis Bank or Yes Bank being such that they can trigger off that correction? A: Currently, the answer is probably no. As long as asset quality remains strong for some of these banks, then any underlying credit cost estimate that one makes will pretty much hold. So, we are not going to correct earnings at least in the current quarter. To that extent, for us to build a very strong call for private sector banks to see a correction from current levels would be difficult. We have seen nearly about four quarters of very strong performance on asset quality. If we see some level of deterioration in some of these numbers only then there will be correction in price targets, otherwise we will not see that happening in this quarter or probably in the next quarter. _PAGEBREAK_ Q: How worried are you about asset quality issues of PSU banks and how much that may linger even through the calendar year? A: For PSU banks, the story moves a little bit different. If one looks at the non-performing loans (NPLs) that has been formed in their balance sheet over the last two quarters, there has been an addition of nearly about 10-15 percent quarter-after-quarter. They have seen slippages of nearly about 3 percent. The recoveries have hardly been there at least for the last 3-4 quarters. In this quarter at least the expectation is that there weill be amount of slowdown in the net addition to slippages – if that happens then possibly the price appreciation that we have seen at least in the last 2-3 months will probably sustain. Having said so, have you taken a materially different call on slippages or on asset quality? The answer is probably a no, at this point of time because a lot has been discussed and we are yet to see any of the large formation of slippages on the corporate book especially, on the infrastructure side where most of these banks have lend their balance sheet very aggressively over the last 3-4 year’s time. A call will be that we will see some quarters of very strong performance with this quarter being of such a performance. Q: What would you expect to see on State Bank of India (SBI) and what kind of stance do you guys have on that stock? A: In the entire public banks space we have SBI as the preferred pick. From an upside perspective on the stock we don’t see beyond about 5-7 percent here too. The main problem, which this bank has is the correction of its margin profile. The bank did about 4 percent about four quarters back and it is now currently about 3.5 percent. The revenue growth side of the story is clearly under stress. We are likely to see net interest income (NII) for this particular bank at probably a flat number or a slight decline over the third quarter of the previous year. With this kind of performance, it is going to be little bit difficult for the bank to maintain if the underlying slippages is maintained at the last few quarters levels and that is going to be the biggest challenge for the bank. Unless we see a very strong improvement on asset quality further price appreciation from current levels would be fairly restricted. Q: What are your top bets from the Non Banking Financial Companies (NBFC) space now with regard to the banking license possibilities or even otherwise? A: It is very difficult for us to put a name on the banking license, simply because the number of participants and the way the guidelines is going to be formed is yet to be firmed up. Even on the NBFC side, if one looks at the kind of appreciation that we have on stocks form current level - it seems to be very restricted. We have probably a couple of entries out there, which can fall into the category of top picks. We have Shriram Transport Finance as one of the preferred players. Q: What about some of the gold loan companies? A: For some of the gold loan companies the biggest relief has been the fact that the regulatory overhang, which was seen in some of these entities passed. It broadly favours the gold loan companies more than anything else. But having said so, these companies are going through a period of correction. They are likely to report a very marginal or a very small loan growth at least in the current quarter. One can expect some of these companies to probably start expanding their balance sheet somewhere closer to the end of this financial year or more so in the next financial year rather than it being in the current quarter.