Post Q3, CLSA underweight on PSUs; sees value in private banks

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Moneycontrol Bureau

Public sector banks were hit quite badly in December quarter earnings. Brokerages also downgraded many PSU banks after third quarter earnings reported either losses or sharp fall in profit due to higher provisions post RBI directives. However, less impact on asset quality compared to PSU banks helped private banks to remain favourite of brokerages.

CLSA maintains underweight rating on PSU banks and sees value in private banks after a stress-test on Indian banks post Q3 earnings.

In Q3, non-performing loans (NPLs) for banks (under CLSA coverage) increased Rs 86,000 crore (1.8 percent of loans), which was led by a rise in downgrades on the RBI's directive (around 50 percent of slippages) and in sectors like steel, infra and textile. As a result, stressed asset ratio rose to 12 percent of loans.

During the quarter ended December 2015, the Reserve Bank of India asked banks to clean up their balance sheets by March 2017.

PSUs were worst-placed and accounted for around 90 percent of slippages in Q3; their stressed loan ratio has reached 15 percent of loans.

According to CLSA, Q4 NPL addition is likely to be over Rs 70,000 crore (though a bit down QoQ) and, like Q3, 90 percent of this could be from PSU banks - their stressed loan ratios are now at 11-23 percent.

As far as FY17 is concerned, the brokerage says it expects NPL formation to fall but if it sees a repeat of 2HFY16 (stress case), then NPLs will be around 50 percent higher, adding higher credit costs (at 50 percent provisions) & loss of interest income can push most PSUs into losses and net NPLs would exceed net worth in some cases.

In that case, it feels PSU banks will need USD 15 billion in capital to reach the 9 percent core Tier 1 mark by March 2017 and in some cases this may be +100 percent of current market capitalisation, but private banks are better placed and would have Tier 1 CAR of +11 percent even in a stress case.

The Government and RBI are exploring options to support their (PSU banks) capital needs, besides increasing the amount of capital infusion. These include recognition of revaluation profits in Tier 1 capital, other PSUs investing in Alternate Tier 1 bonds and a delay in the Basel rollout.

Despite PSU banks’ low valuations, CLSA retains cautious view given their low profitability, weak CASA franchise and asset quality. Among the PSUs, it prefers SBI/Bank of Baroda, and cut target price on Corporation Bank to Rs 20 (from Rs 40) while putting sell rating.

Among private banks, ICICI Bank, HDFC Bank and IndusInd Bank remain top picks, the brokerage says.

For ICICI Bank, CLSA runs two stress tests - one is that FY17 sees a repeat of 2HFY16 and second is 25 percent of infra/metal loans slip into NPLs (total slippage of around 40 percent). In both scenarios, it says the bank won't need any fresh capital and it believes that Rs 170-190 will be a good entry point, adding progress of corporate deleveraging can abate concerns. CLSA maintains buy rating on the stock with a SOTP-based price target of Rs 320.Posted by Sunil Shankar Matkar