Recommendations » India
Banking 3QFY2013 result review and anlysis
3QFY2013 snapshot - Asset quality stress continues, as slippages remain elevated; but the extent of asset quality deterioration shows diminishing signs: Annualized slippage ratio for PSU banks under our coverage moderated to 2.8%, from 3.5% in 2QFY2013. Considering different disclosure practices being followed by banks, wherein some net-off any inter-quarter movement of NPAs, while some dont, to corroborate our understanding that the extent of asset quality deterioration is increasingly reflecting diminishing signs, during 9MFY2013 the increase in annualized slippage ratio was 43bp yoy, lower than the increase of 91bp yoy witnessed in 1HFY2013. Most of our coverage PSU banks witnessed moderate performance on the recoveries & upgrades, which led to an 8.0% qoq increase in gross NPAs for them.
Private banks continue to perform relatively much better vis-ΰ-vis PSU banks on the asset quality front, as they not only reported sequentially lower slippages, but also posted better recoveries and upgrades performances, which aided them to limit the sequential increase in their gross NPA levels to just 1.2% in 3QFY2013, much lower compared to an increase of 3.7% witnessed in last quarter.
Asset quality pressures continued to reflect on the sectors margins during the quarter, as nearly half of our coverage banks reported sequentially lower margins, primarily due to higher interest reversals/lower income recognition during 3QFY2013 on increased slippages/elevated gross NPA inventory.
Overall, PSU banks reported a weak performance during 3QFY2013, as interest reversals/lower interest recognition and higher provisioning led to a 5.1% yoy decline in bottom-line. Private banks continued to report impressive performances, with an operating profit growth of 25.1% yoy. On the earnings front, new private banks reported a strong growth of 28.7% yoy, while old private banks witnessed a healthy growth of 20.3% yoy.
Given the economic environment, continue to prefer Private banks: Decelerating economic growth environment, policy woes in select sectors and elevated inflation and interest rates point towards further economic stress and are not suggesting any conclusive trigger for improvement in asset quality in the near-term. Hence, we prefer private banks, given their favorable cyclical and structural outlook, with Axis Bank and ICICI Bank being our top picks. But with the risk of higher competitive intensity in light of higher number of likely new entrants, the upsides are expected to be relatively more moderate than estimated earlier.
Due to cyclical macro concerns, PSU banks are already trading at depressed valuations. Even, higher number of likely new entrants in the sector, create a structural impediment for PSU banks medium-term re-rating, as we expect them to lose market share in any case, considering their capital crunch. Upsides in these stocks would largely depend on an eventual economy turn-around, which would lead to lower re-pricing of high-cost deposits (relative benefit for low-CASA banks) and higher recoveries (relative benefit for banks that have experienced maximum asset quality pain, and importantly, also provided for it already). Screening for these criteria, as well as Tier-1 capital adequacy and trailing adjusted valuations, in our view, PSU banks that would stand to gain the most from an eventual turn-around include State Bank of India (SBI) and Punjab National Bank (PNB) among the large-caps and United Bank, Corporation Bank and Indian Bank among the mid-caps.
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