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PSU banks performance dismal in Q1 FY13: Dolat Cap

Dolat Capital has come out with its report on banking sector. According to research firm in Q1 FY13 on asset quality front, PSU banks performance was quite dismal with sharp jump in gross slippage ratio. SBI, UBI, Andhra Bank and BoI posted highest increase in slippages ratio on sequential basis.

August 28, 2012 / 05:20 PM IST
 
 
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Dolat Capital has come out with its report on banking sector. According to research firm in Q1 FY13 on asset quality front, PSU banks performance was quite dismal with sharp jump in gross slippage ratio. SBI, UBI, Andhra Bank and BoI posted highest increase in slippages ratio on sequential basis.



  • In Q1 FY13, private sector banks demonstrated better performance on balance-sheet expansion, stability of margin and asset quality fronts. On deposit mobilization front, each of the private sector banks under coverage (barring ICICI Bank) recorded higher deposit growth than the industry and state-owned banks. Smaller private sector posted much higher expansion in deposit base; among state-owned banks, IOB, PNB and Andhra Bank were ahead of its peers.
  • Overall, banks’ deposit profile demonstrated weakening with decrease in CASA share. KVB and Andhra Bank surprised with increase in CASA share even in such tight liquidity condition; in case of KVB, current deposit mobilization significantly aided CASA share.
  • Private sector banks under coverage outshined state-owned banks and industry overall in credit disbursements. Smaller private sector banks under coverage were better off due to their lower bases. State-owned banks (under coverage) recorded lesser credit book expansion than the industry overall. Canara Bank moderated its credit growth to further reduce dependence on wholesale advances and short-term corporate loans on unsecured basis.
  • On asset quality front, PSU banks performance was quite dismal with sharp jump in gross slippage ratio. SBI, UBI, Andhra Bank and BoI posted highest increase in slippages ratio on sequential basis. IOB and OBC recorded sequential decline with higher base in Q4 FY12. Private sector banks were better off on this front as well in our coverage universe.
  • Though, some of the state-owned banks (under coverage) reported higher credit cost on sequential basis but not enough to maintain PCR. Most of banks under coverage reported sequential decrease in PCR except for OBC, Syndicate Bank and ICICI Bank.
  • Most of banks under coverage posted further increase in outstanding restructured loan book except SBI, HDBK, ICICI Bank and KVB. Overall, on asset quality fronts, incrementally PSU banks were further hit with increase in gross slippage ratio, outstanding restructured loan book and decrease in PCR.
  • On margin front, most of banks witnessed sequential fall in margin except for OBC and PNB. Syndicate Bank and BoI reported biggest fall in margin on sequential basis mainly due to larger fall in credit yield on the back of downward revision in rates, much higher slippages and loan restructuring at lesser rates.
  • Sequential decrease in C-D ratio with downward revision in lending rates, re-pricing of liabilities with a lag had negative impact on banks’ margin. Among PSU Banks, Syndicate Bank and Andhra Bank recorded sequential increase in C-D ratio and among private sector banks, HDBK and ICICI Bank posted further expansion in C-D ratio.
  • On fee income front, most of banks recorded healthy growth on YoY basis; SBI, Syndicate Bank and ICICI Bank were outliers with relatively lesser traction in our coverage universe.
  • Overall, banks under our coverage took a beating on profitability level on sequential basis. OBC, Syndicate Bank, SBI and Andhra Bank recorded improvement in RoA on sequential basis. OBC’s performance was robust all along and could report better performance, but in case of SBI and Andhra Bank, in spite of much higher additions to GNPL, these banks made lesser NPL provisions and took a dent on their PCR. In case of Syndicate Bank, high tax credit succored the profitability.

ICICI Bank (CMP: Rs 956, TP: Rs 1,323, Buy):



  • ICICI Bank’s traction in business expansion, improvement in margin, reduction in credit cost  and decrease in leverage (with expansion in balance-sheet size) would yield higher return  ratios going forward.
  • We expect credit book to expand in high teens (e e pec c ed boo o e pa d g ee s 20% CAGR during FY12-14E) driven by SME, retail & working capital requirements.
  • The bank would record NIM in a range of 2.8-2.9% on the back of higher yield on investments, reduction in losses on securitized book, traction in overseas business and stability in CASA deposit share
  • We expect that the bank’s other income to grow by 17% CAGR over FY12-14E on the back of healthy core fee income.
  • With tier I capital of 12.8% (as on end-June’12), the bank is adequately capitalized. The bank would not be required to raise equity capital in near future.
  • The bank quotes at cheap valuations, hence offer an opportunity to add to the positions. At current price, the stock quotes at 1.8 xs and 1.7x adjusted book value (ABV) FY13 and FY14 respectively. Based on our price target of Rs 1,323, the stock will trade at 2.6x and 2.3x ABV FY13 and FY14 respectively.


HDFC Bank (CMP: Rs 596, TP : Rs 627, ACC):



  • HDBK’s diversified credit book with prudent expansion strategy has led to healthy yield and minimal delinquencies. High low-cost deposits share contain erosion in margin and also aides the bank to cross-sale its other products to huge low-cost depositors base. We expect credit to expand faster than the system at CAGR of 21% over FY12-14.
  • Slight re-balancing in credit book in favor of high-yielding assets aided yield on advances (mainly due to higher composition of retail loan book). Higher asset yield and expansion in CD ratio aided margin. Going forward, we expect NIM to stabilize at 4.2% on yearly average basis.
  • Majority of fee income comes from various retail segment and is quite diversified. Incremental adverse impact on the bank’s fee income would be muted. 
  • HDBK demonstrated robust performance on asset quality front; GNPA & restructured loan book remained almost stagnant. The bank has been maintaining most comfortable asset quality amongst the peer group with GNPA at 0.97% and NNPA at 0.2%. Total restructured assets were 0.3% of the bank’s gross advances as of Q1 FY13.
  • At current price, the stock quotes at 4.0x and 3.4x adjusted book value (ABV) FY13E and FY14E respectively. Based on our target price of Rs 627, the stock would trade at 4.2x and 3.6x ABV FY13E and FY14E respectively.

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Karur Vysya Bank (CMP: Rs 401, TP : Rs 512, Buy): 



  • Karur Vysya Bank’s better understanding of clienteles’ business domain and widespread regional presence are the key strengths. Continued robust credit book expansion and contained delinquencies have been key outcomes of the bank’s strengths.
  • We expect the bank’s credit book to expand e e pec e ba s c ed boo o e pa d by 28% cagr in FY12-14 much higher than the industry. Key focus area would be retail trade, SME and agriculture sectors.
  • In Q1 FY13, KVB’s margin drifted by 22bps QoQ to 2.82% on higher cost of funds, however going forward, moderation in deposit growth and increase in credit-deposit ratio would protect erosion in margin. Though, the decline in CASA share remain our near term concern. We factor margin to drift by 26bps to 2.62% (on yearly average basis), as a conservative stance.
  • We expect GNPA to hold in the current level even as the marginal pressure on asset quality would be mitigated by higher recoveries and upgradations.
  • At current price, the stock quotes at 1.4x and 1.3x adjusted book value (ABV) FY13 and FY14 respectively. Based on our price target of Rs 512, the stock will trade at 1.8 xs and 1.6x ABV FY13 and FY14 respectively.

Syndicate Bank (CMP: Rs 95, TP : Rs 145, Buy)



  • Syndicate Bank’s management plans to expand credit book faster than the industry, in the range of 18-19% and retail credit book would grow at even faster pace of 22%. Key focus area for credit growth would be retail, MSME and mid-corporate. We expect credit book to grow 17.4% CAGR in FY12-14. Faster expansion in retail and MSME books would aid asset yield and margin.
  • The bank plans to increase its CASA share by 100-125 bps to 32% mark. Also, re-pricing of bulk deposits and CD at lesser rated would aid margin erosion in declining interest rate scenario.
  • The bank’s management expects 15bps decline in margin to 3.25% from 3.4% in FY12. We factor in 10 bps decline in margin to 2.96% (on yearly average basis) primarily due to decline in interest rates and re-pricing lag of liabilities.
  • On the back of higher loan growth and alignment of processing charges with peers, fee income is expected to revive. We expect the bank’s other income to grow by 13% YoY in FY13.
  • As on June’12, the bank’s asset quality improved on sequential basis; further higher PCR provides comfort for future NPL provisioning. The bank’s management expects to do substantial recoveries in FY13.
  • At current price, the stock quotes at 0.65x and 0.56x adjusted book value (ABV) FY13 and FY14 respectively. Based on our price target of Rs 145, the stock will trade at 1.0x and 0.9x ABV FY13 and FY14 respectively.

Conclision:



  • Overall, in Q1FY13, private sector banks outshined state-owned banks qualitatively and quantitatively. Private Banks reported healthy growth in core fee income with firm margin (barring CUB & KVB). Asset quality also remained under control with some additions in restructured loan book in CUB and Axis Bank. Overall, private banks’ performance remained strong on CASA deposit, incremental gross slippages & provision coverage on balance-sheet side.
  • Majority of the state-owned banks’ performance was poor mainly due to strain on margin and further increase in slippages ratio. PSU banks’ provision coverage ratio came down due to lesser credit costs and also reflecting banks’ efforts to push bottom-line at a cost on their buffer.

Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

To read the full report click on the attachment

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