Prefer ICICI Bank, Yes Bank, SBI, PNB: Dolat Capital

Indian banking sector Q4FY13 review by Dolat Capital

Private banks once again outperformed the PSBs on earnings performance for Q4FY13. This was largely differentiated by the asset quality and NIM performance. While the balance sheet growth for banks has been the slowest in the past many quarters, especially for the private banks, their asset quality performance and NIM improvement were in stark contrast to PSBs (Public sector banks). Private bank’s Gross NPLs and fresh NPL formations saw only moderate fluctuations, while amongst PSBs there was high volatility on these variables. SBI on one hand saw significant drop in fresh NPL formations while Allahabad saw significant rise. On the margin front, private banks’ reported improvement in NIM, both YoY and QoQ with material surprises in case of some banks like AxiS Bank and ING Vysya.

Banks like SBI, PNB, Canara Bank, Union Bank have seen a reduction in delinquency ratios over the past 3 quarters. NPL recoveries also improved for SBI, PNB and Canara Bank during Q4. While a more meaningful turn in the rate cycle would also aid in improving the overall macro environment, we believe that as economic growth starts to improve over the next couple of quarters, asset quality related concerns should start to abate.

The net interest income for the sector (covered 25 banks) grew 7 percent YoY with private banks reporting a strong 24 percent YoY growth and PSBs witnessing an almost flat NII growth. Barring a few, almost all private banks saw improvement in NIM on YoY basis which aided the NII growth whereas PSBs saw significant dip in NIM.

Private bank’s pre-provisioning operating profit growth was again much better than the PSBs, driven by the NII growth. For PSBs like SBI, PNB, Union sluggish other income and higher growth in opex impacted the PPOP growth.

Net profit for the sector was down 5 percent YoY, dragged lower by the 19 percent YoY drop in net profit of PSBs. The rise in provisions impacted the profitability growth of PSBs, despite most of them benefiting from lower tax rates and tax write-backs. Higher amounts of asset related provisioning and also for the expected wage hikes led to the sharp increase in provisions for PSBs. Private banks continued to deliver strong bottom-line performance with 25 percent YoY rise in profitability, on the back of strong operating performance and stable asset quality.

We believe that private banks would continue to outperform the sector and shall continue to attract premium valuations due to their consistent performance and superior asset quality. Asset quality related stress remained on the PSBs, however some of them have fared better than their peers and we believe should continue.

An improved trajectory in terms of lower fresh NPLs and improvement in NPL recoveries. Valuations of some PSBs have corrected by around 15-20 percent over the past couple of quarters and have become quite attractive. Further softening of bond yields should bode well some PSBs and the treasury gains should in part be able to absorb the higher asset and wage related provisions.

We continue to prefer ICICI Bank, Yes Bank and KVB amongst the private banks. Amongst the PSBs we like SBI and PNB as they have been able to improve their asset quality over the past 2 quarters and it should now remain stable even in tough environment in the near term. PBRs of 0.8x on FY14 BVPS for PNB and 0.9x FY14BVPS for SBI (adjusting for investments) is attractive, in our view.

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