Axis Bank, ICICI Bank top picks: PLilladher

Prabhudas Lilladher has come out with its report on banking space. Axis Bank and ICICI Bank are the top picks in the space.

We met with RBI to get an update on the regulatory landscape for banks. Regulatory news flow on NBFCs has eased significantly over the last six months. However, for banks, we believe that the provisioning pressure could continue to remain elevated. Provisions will continue to be inched-up on restructuring and more importantly, RBI remains certain of implementing Dynamic provisioning which has significant implications for bank.s medium-term profitability. Though we remain positive on banks, we would like to caution investors against ignoring these headwinds, especially after the last 3-4 months of rally, as valuations is not undemanding anymore in many names. Axis/ICICI remains our top .BUYs. and impact from potential provisioning headwinds is relatively lower on them as well.

Provisioning on restructuring to move up further in FY14: The Mahapatra committee had recommended to increasing provisioning on restructuring from 2% to 5%. In the interim, RBI increased provisioning on restructured assets to 2.75% from 2.0% in Oct-12. RBI has indicated that in line with the committee’s recommendation, they will inch-up provision on restructuring, from 2.75% to 5% over the next 18 months – There will be some offsets from upgraded accounts but still we expect ~10-15bps additional provisioning because of this for PSUs.

Current account de-regulation? Media reports indicated that bankers in their pre-policy meet have asked RBI to allow them to pay interest on CA deposits, given the fall in systemic current account balances. Being the only interest rate still regulated, RBI is willing to put thought to it, but currently believes that the high transactional nature (lower need to pay) + pricing competition would be their key considerations over the medium term.

Inorganic growth by New Bank Licensees? RBI’s draft/comments have been silent on inorganic growth by a new Licensee and feedback suggests that instead of framing a rule regarding acquisitions, RBI may consider each M&A proposal on their own merit which could be good news for new bank Licensees.

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