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Banking sector – Near-term pressures but outlook remains strong
The BSE Bankex has corrected by 8.9% as compared to the Sensex, losing 2.3% since the
news of the bribe–for–loans scam came into light. The correction has been further
accentuated by fast rising term deposit rates, in line with our view, and negative news flow
on the MFI and telecom-related exposures of few banks.
On account of the strong GDP growth (8.9%) in the first half of FY2011 and promising
outlook for the second half, credit demand is expected to remain healthy at above 20% for
the entire FY2011. We believe term deposit rate hikes will continue in the near term as
deposit growth continues to lag credit demand by a wide margin (credit growth in the
fortnight ended November 19, 2010, stood at healthy 22.7% yoy, while deposit growth
was 15.8% yoy).
Hence, we continue to prefer larger banks with a strong CASA ratio. Among private banks,
we have a positive view on ICICI Bank (TP: `1,335) and Axis Bank (TP: `1,675). While in
the large PSU banking space, we prefer State Bank of India (TP: `3,504) and Bank of
Baroda (TP: `1,085). In the midcap banks universe, we prefer Jammu & Kashmir Bank
(TP: `1,062) and Indian Overseas Bank (TP: `186).
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