Citi :Banks: 2011 Sector Outlook

Visit http://indiaer.blogspot.com/ for complete details �� ��


Macro Shines Stronger than Valuation Clouds
 Outlook for 2011 — 2010 was a great year for Indian banks and the sector
outperformed the benchmark by 23% YTD – supported by a strong economic
recovery, sharp reduction in asset quality pressures, rising Net Interest
Margins and healthy loan growth. We believe the overall macro environment
continues to be supportive for banks – GDP growth is likely to be over 8.5%,
loan demand should stay healthy and profitability relatively high. While there
is some pressure on banking system’s liquidity, the RBI has provided
enough indications of keeping it within manageable limits. In sum, while an
encore might be challenging, given relatively higher valuations – it should
still be a beneficiary of India’s continued economic momentum.


 Key Trends to take advantage of — We believe the key trends in 2011 will
likely be: a) Infrastructure led growth – an oft repeated one – but still likely
to provided the maximum delta in loan growth for the sector (larger banks
are likely positioned better to participate in the growth); b) Deposit Mix – a
 turn from excess liquidity to a bit of a squeeze, is likely to increase
competitive intensity and push up funding costs (Private banks typically
manage liquidity better, large PSU counterparts also competitive); and c)
Asset quality – we expect private banks, having taken higher credit costs
over last 18 months to start showing bigger reductions in credit costs than
government banks.
 Key Risks to watch for — We believe the key risks could come from: a)
Inflation – has proved to be more stubborn than expected, could force RBI
to raise rates faster/higher than expected; b) Lower funding growth – deposit
growth will likely remain a laggard and could cap growth/pressure NIMs; and
c) Asset quality concerns – recent weeks have thrown up increasing
regulatory / environmental risks to asset quality – will firmly remain on the
watch list for now.

 Top Picks — While we remain slightly overweight on the sector, we will be
selective in stock picking and not chase very high valuations. We maintain a
bias towards large private sector banks and those with strong deposit
franchises. Our top picks in the space would be SBI and Kotak. We would
avoid stocks with higher interest rate sensitivity and relatively expensive
valuations (BOB). We also remain watchful of higher capital market
exposures / sensitivity – (Edelweiss, Reliance Capital).