Here's why private banks will outshine PSU peers

Banks corrected after the central bank announced measures to suck out excess liquidity from the economy. Nilesh Parikh of Edelweiss Securities says that this move will lead to a situation of high stressed margins for public sector banks.

"I think the state-owned banks considering that most of them have actually cut their base rate recently, so that is going to put an added pressure on margins, along with that the only relief factor for them was the bond gains now. I think visibility of that has gone away," adds Parikh in an interview to CNBC-TV18. Also read: Kotak Mahindra Bank Q1 PAT up 43%, but NPA disappoints
On the contrary, Parikh expects private banks to be able to manage higher credit costs and hence stressed assets. Below is the edited transcript of Parikh's interview to CNBC-TV18. Q: What are your first thoughts on Kotak Mahindra Bank numbers?
A: I think at operating level, the numbers are slightly ahead of estimates. Margins have come in ahead. I think we need granular details on Non-Performing Asset (NPA) largely in terms of whether it is some bit of stressed asset portfolio that they have bought. I will be able to comment largely once we get some granular colour on that. Q: They have said that they had bought a stressed asset portfolio and that has been fully accounted for.
A: Overall, the NPA numbers do seem slightly higher than what we would have thought. However, at operational levels, I think net interest income (NII) and subsidiary performance, is broadly in-line with expectations. Q: What is your sense about the forward-looking asset quality because provisions have actually gone up very sharply? So, provisions for the quarter stand at Rs 159 crore, which compares with Rs 19 crore on year-on-year basis and compares with Rs 43-44 crore on a quarter-on-quarter basis? Are you getting a sense that since the bank sees it so prudent to provide so much more compare to what they used to that perhaps there is going to be more asset quality stress in the store?
A: There could probably be there could be two things one is they could have taken some floating provisions and we have seen some of the private sector banks step up floating provisions during the last two quarters. So, there could be some impact of that and second I think with this stress asset portfolio that they have bought maybe there will be some provisions, which would be necessary because of that. So, I think once we get details probably we will be able to comment more on that. Q: Would you worry about the Non-Performing Loans (NPL) now in the system itself, because HDFC Bank also showed a rise in NPLs and I think for the second quarter running now? Would you worry that we are going to get nasty shocks in the public sector banks? We also have the added stress of money market tightening though of course that is for forthcoming quarters?
A: For the state-owned banks, one could see slippages remaining elevated. What is something that we need to highlight is the restructuring pipeline. So, what came in as a negative surprise were the referrals during the quarter and that tells us that the restructuring addition for the banking system would continue to remain high over the next few quarters.
The economy has moderated from the high levels to close to about 5 percent. The private sector banks cannot be absent of any stress but I think it is still within manageable levels.
The reason why we saw big increase or in terms of HDFC Bank was because they were operating at a lower base. Looking at the granular details, they have mentioned on the call also that these were smaller accounts, not sector specific, not region specific. So, I believe that it is still within manageable levels.
Commercial vehicles (CV) is portfolio where HDFC Bank has been witnessing stress over the last few quarters, but when you segment that that portfolio is just about 4-5 percent of their loan book. So, it is within control, but compared to the state-owned banks considering that we have not seen any moderation in corporate stress we would continue to see slippages plus the restructuring remaining elevated. Q: From the results that have come where are you in the buy zone as far as private banks are concerned?
A: So far, IndusInd has clearly delivered. We have seen some bit of moderation and rise of cost of funds has kept their margins stable. But overall, asset quality still continues to remain within manageable levels and I think that is the same story for retail focused banks.
We don’t expect any uptick in their asset quality numbers and same is the case for some of the private sector banks be it Axis or Yes Bank. I think asset quality atleast for this quarter should hold up. But going forward, with money market rates behaving where they are and the situation stressing on for couple of months or quarters, then I think we could actually have to start revising our NPL estimates for the private sector banks also. Q: At this juncture would you want to keep a buy on the banking system at all because of this potential that there could be stress and there could be money market tightness? Yesterday HDFC Bank even spoke of a potential of deposit rates increasing and therefore lending rates going up. So, is the banking sector itself a buy for you?
A: At Edelweiss level we are neutral on the sector, clearly overweight on private sector banks and cautious on the state-owned banks.
The kind of correction that we saw over the last couple of days with the RBI measures was largely unexpected and caught everyone unaware. Considering that most of these banks still have retail franchise which is strong, we have done our bit of work in terms of analysis, in terms of the impact that banks could have because of these measures and if this prolongs over a period of time.
We have cut our GDP estimates from about 6 percent to about 5.7 percent and are taking a higher elevated credit cost. We believe that the impact on the numbers for private sector banks could still be within a manageable level. So, it could be about 5-10 percent, not more than that.
I think the state-owned banks considering that most of them have actually cut their base rate recently, so that is going to put an added pressure on margins, along with that the only relief factor for them was the bond gains now. I think visibility of that has gone away.