Axis Bank, ICICI Bank top picks: Prabhudas Lilladher

Prabhudas Lilladher has come out with its report on banking sector. The research firm says Axis Bank, ICICI Bank remains top large-cap picks and Federal Bank, JK Bank are top mid-cap picks and PNB remains preferred PSU bank.

We met up with the CDR cell to get an update of quantum of current restructuring. Though December quarter continued to see ~Rs210bn of fresh referrals with some lumpy accounts being referred, outlook for the current quarter looked more sanguine with lower referrals till now and no pipeline of large ticket cases currently. However, some large Infra assets are being restructured bilaterally. We continue to maintain that slippages/restructuring will come off over the next 2‐3 quarters for PSU banks but PPOP level challenges + regulatory provisioning will remain a constrain for big improvements in ROAs. Axis/ICICI remains our top large-cap picks, Federal/ J&K are our top mid-cap picks and PNB remains preferred PSU bank.

Outlook more sanguine but some Infra assets being restructured bilaterally: Dec- 12 quarter had ~Rs210bn of fresh referrals which was similar to average quantum of referrals over the last 4-6 quarters. However, there has been some improvement in the current quarter. Though number of cases referred have remained high (14 cases QTD), total quantum of referrals have come off to Rs35bn in Jan-13, with no large ticket referrals to the CDR cell. But this is also because, some of the Infra assets facing delays/fuel shortages (expected to to be referred to the cell) have been bilaterally restructured within banks (GMR –Rajamundry). 

Second restructuring under check: H2CY12 had seen many second restructuring cases, with second restructuring contributing >25-30% of incremental referrals which was a disturbing trend. However, the current feedback suggests that second restructuring referrals have been lower, indicating account-specific issues in H2CY12 rather than a trend of significant inch-up in these cases. The cell reconfirmed that in accounts where NPV is protected, a second restructuring through CDR cell need not be classified as NPA.

Impact of new restructuring norms: the 2-3 new RBI norms related to promoter contribution of 15% of the bank’s sacrifice and compulsory personal guarantee have been in practise from mid-2012 and is unlikely to have any material impact on the CDR process. However, the constraints relating to enforcement of personal guarantee continue to remain. On increased general provisioning of restructuring, we estimate that ~20‐30% of the restructured book stock could move out of the restructuring category by the end of FY14. We estimate ~3‐5% PBT impact for PSU banks in FY14/15 from higher provisions on restructuring after netting off the release of provisions from the upgrades.

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