JPMorgan: ICICI, Kotak and BOI are our Top picks in Banks

• Strong 2Q11: We expect 2Q11 to be a strong qtr for Banks/Financials,
especially for private banks as credit costs continue to come off. We
forecast PAT growth for our coverage universe at 24% y/y with private
banks expected to report PAT growth of 21% y/y. Sequentially we
expect margins and credit costs to remain flat leading to 3% q/q
improvement over a strong 1Q11.
• Stable margins and improving asset quality: Margins for the sector
are expected to remain stable with the exception of Kotak and Axis
Bank. PSU banks would continue to report strong NII growth given a
weak 2Q11.We expect credit costs for the private banks to decline from
1Q11 given improving outlook on retail asset portfolio, and slippages for
PSU banks to continue to be inline with 1Q11 trends.
• Tepid balance sheet growth: System loan growth has been slow and
hence we expect sequential NII growth to be low at 3% q/q. We expect
HDFC and IDFC to continue to report strong loan growth momentum.
• Key results to watch out for: ICICI Bank: With asset quality in
check, loan growth seems to be the larger market concern for ICICI. We
expect the retail book to stop contracting from this qtr. Treasury income
could be a negative surprise. SBI: Operating metrics improved in 1Q11
but slippages were high. We expect slippages to continue at 1Q11 levels
before improving in 2H11. Axis Bank: Margin is expected to contract in
this qtr but we do not expect margins to drop below 3.5% (3.7% in
1Q11); sharper margin moderation would be a negative surprise.
• ICICI, Kotak and BOI are our Top picks: With improving loan
growth and asset quality, ICICI Bank is our top pick among private
banks. We expect Kotak bank to surprise on asset quality and costs due
to operating leverage, and for consensus to be revised up. Among PSU
banks, BOI is our top pick to play the turnaround in asset quality.