Banks asset quality to remain under pressure: KRChoksey

KR Choksey has come with its September quarterly earning estimates for Banking sector. According to the research firm, asset quality of banks is likely to remain under pressure due to slowdown in economy activity, increased stress in mid and large corporate, policy paralysis and high interest rates.

KR Choksey Q2FY13 result preview for banking sector: Our BFSI universe earnings to grow 26.9% y-o-y & 6.6% q-o-q on the back of favorable base, relatively better show in fee income, better treasury performance and in check provisions. Private sector banks continue to report healthy and consistent operating performance with earnings growth of 28.4% y-o-y and 7.7% q-o-q. HDFC Bank, ICICI Bank and Indusind Bank will outpace private sector banks’ aggregate earnings growth. While we expect PSU banks to deliver 30.5% yo- y and down 4.8% q-o-q earnings growth driven by favorable Y-o-Y base, higher trading gains, better cash recoveries and stable provisions sequentially. Overall margins of the sector is likely to under pressure Q-o-Q due to cut in lending rate and base rate offset by fall in retail deposit & wholesale deposit rates. Slippage quarter run rate will steady from Q1FY13 levels but we expect PSU banks continue to report higher restructuring numbers in Q2FY13. Most of the restructuring will driven from SEBs, textile, mid corporate & SME segments and borrower specific problems. We believe pace of NPA formation would slow down on sequential basis while recovery and up gradation will see moderation Q-o-Q. We believe asset quality of banks is likely to remain under pressure due to slowdown in economy activity, increased stress in mid and large corporate, policy paralysis and high interest rates. The corporate debt restructuring cell has seen a rise in new cases in Q2FY13. A large number of road, telecom, iron and steel and textile projects have come up for restructuring. We expect marginal relief in terms of slowdown in pace of NPA formation on sequential basis due to better shaped corporate balance sheet, lower interest rate expectation and marginal improvement in policy environment. We believe incremental slippages will come from mid corporate, stress SMEs, infrastructure, power, aviation etc. Broadly we don’t foresee a meaningful respite in asset quality front during the quarter. Factors to watch out for in the Q2FY13 results: Loan book growth, drivers of growth – retail vs. corporate and sectoral credit growth trend CASA deposit mobilization run rate especially saving bank deposits in mid size private sector banks Fresh slippages, incremental loan restructuring, and recovery rate vs. quarterly run rate need to watch out. Management commentary on asset quality trend, restructuring pipeline and growth outlook on 2HFY13. Trading gains trend and AFS book duration movement Net interest margin trend. Valuation: The Bank Nifty has outperformed 2.8% the market benchmark in last three month. We believe outperformance in banking stock is largely attributable to slew of policy reforms, reduction in twin deficit, NPA cycle near to peak out, boost to investment sentiment and growth revival measures. We believe investors should gradual shift in stock position from high quality retail banking names to corporate / industry finance focused banks due to possibility of further re-rating, abatement of asset quality concerns and growth revival. We maintain our REDUCE rating on HDFC bank & Kotak Mahindra Bank on expensive valuation and unfavorable risk-reward. We continue to reiterate our high conviction buy rating on Axis Bank & ICICI Bank on favorable risk-reward for medium to long term investments. Key risks to our recommendation – Sharper than expected slippages and tail risk from global economic developments. Top Buy: Axis Bank, ICICI Bank, Bank of Baroda, State Bank of India, Andhra Bank and Bajaj Finance Top Sell: HDFC Bank, Kotak Mahindra Bank and HDFC Ltd

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