Long IndusInd Bank, Yes Bank: Edelweiss

Edelweiss' report on Banking and Financial Services (BFSI)We expect Q2FY16 to be characterised by improvement in earnings. However, the divergent earnings trend between private and PSU banks is likely to sustain. Industry credit growth, running at multi-year lows, will continue to pressurise banks’ top line growth, especially corporate heavy PSU players. This, along with NIMs pressure (full impact of base rate cut effected during Q1FY16), will restrict NII growth. Core fee income is anticipated to remain muted given subdued corporate banking activity. Asset quality trends should be broadly stable QoQ with banks incrementally resorting to the 5/25 route. Given the fall in bond yields, banks are likely to get treasury fillip. Business momentum in NBFCs is likely be tepid, largely a derivative of below-average monsoon; their asset quality may weaken given slower recovery momentum.Outlook for next 12 months"We believe the financial space will be key beneficiary of sharpened focus on reducing asset quality baggage coupled with tailwinds of turning interest rates and improving credit growth (albeit with lag). Private banks are likely to fare better riding superior risk management practices, strong liabilities traction and robust capital position. Taking cue from RBI and government actions, we foresee structural changes bolstered by improving macros to fire ratings upgrade cycle, aiding large PSU players (SBI, BoB and PNB) and expect the valuation gap with private banks to narrow. However, inherent challenges will force smaller PSU banks to consolidate before finding their niche. NBFCs will benefit from the rate cycle reversal and we prefer mortgage players."Trading ideas from Q2FY16 earnings perspectiveLong: IndusInd Bank, Yes Bank; Short: Mahindra & Mahindra Financial Services (MMFS), Kotak Mahindra Bank.For all recommendations, click here 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.

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