Quarterly preview of banks by religare research,

Banking
Earnings momentum likely to remain strong
We expect yet another strong quarter from banks under our coverage. NII is
estimated to grow by 33% YoY for our coverage universe (albeit from a lower
base of Q2FY10); however, net revenue growth could be relatively lower at 22%
YoY due to muted trading gains and lower fee income growth. Asset quality could
witness some pressure in Q2FY11 (particularly in PSU banks and Axis Bank,
AXSB) and we are therefore factoring in higher provisioning expenses for some
banks. However, we note that delinquencies are likely to peak in Q2FY11 and
thereafter improve in H2FY11. Overall, we expect 27% YoY growth in preprovisioning
profit (PPP) and 25% growth in PAT for our coverage universe. We
remain positive on the sector and continue to prefer banks with a strong liability
franchise. Our top picks are State Bank of India (SBIN), Bank of Baroda (BOB),
Punjab National Bank (PNB) and AXSB.
Advances to grow by 20%+ YoY, stable NIMs QoQ: Credit growth has remained
subdued in Q2FY11 with system-wide credit likely to grow by just 1–2% QoQ.
On a YoY basis, however, credit growth is expected to remain strong at ~20%+
for our coverage universe (barring ICICI Bank, ICICIBC) due to disbursals to
telecom operators in Q1FY11. For ICICIBC, we are factoring in a stable loan
book YoY and a 3% QoQ uptick.
Margins to remain stable: We expect margins to remain stable QoQ as the
impact of hikes in deposit and short-term wholesale rates would be mitigated by
the increase in prime lending rates (PLR). On a YoY basis, margins would
improve for banks, particularly PSUs, partly on account of the low base in
Q2FY10, translating into strong 33% NII growth for Q2FY11. While we expect
incremental C/D ratios to decline and deposit rates to inch up further, we do not
foresee significant pressure on NIMs as pricing power returns to the system in H2
with higher credit offtake.
Other income to be subdued: We expect other income to remain flat YoY for our
coverage universe as the increase in bond yields (10-year G-sec yields up ~30bps
in Q2FY11) would restrict treasury gains (the base is also higher as banks had
booked healthy treasury gains in Q2FY10). Fee income growth would also be
lower due to lower commission rates on third-party product distribution.
Delinquencies to remain high for some banks; expected to improve in H2: Some
banks (particularly PSUs) could report higher slippages in Q2FY11, as witnessed
in Q1. Moreover, higher bond yields could lead to MTM losses on the
investment portfolio of some players. Consequently, we are building in higher
provisioning expenses—we expect provisions to increase by 13% QoQ for our
total coverage universe and 19% for PSU banks. While asset quality could be
under pressure in Q2FY11, we note that outlook would improve from H2FY11 as
slippages peak out and recoveries/upgrades improve.
Outlook and top picks: Q2FY11 is likely to be another strong quarter for Indian
banks with a strong 25% earnings growth and 27% growth in PPP. While we
maintain our positive stance on the sector, we continue to prefer banks with a
stronger liability franchise in a rising rate environment. At current levels, SBIN,
BOB, PNB and AXSB are our top picks. Higher-than-expected slippages,
especially from restructured accounts, is the key risk.