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A host of factors like RBI’s aggressive monetary tightening policy, moderation in
credit growth, pressure on NIMs and concerns over further deterioration in asset
quality have created headwinds before the Indian banking sector. However, despite
these challenges we don’t expect any major impact on profitability and return
ratios, viz., ROA and ROE, which will be cushioned by low operating expenses,
lower credit costs as banks are carrying high provision coverage and no immediate
need to raise capital. We initiate coverage on the Indian banking space with
our pick of select eight stocks. We have a BUY recommendation on ICICI
Bank, Bank of India, Axis Bank and Yes Bank.
Private banks preferred over PSU banks: With increase in key interest rates,
the valuation gap between private and PSU banks has increased in the past. In a
high interest rate regime, PSU banks lose market share to private banks, as they
find it difficult to generate new loans. Private banks, meanwhile, are better at
managing a balance between lending and deposit rates and, therefore, stand a
better chance at protecting NIMs. Besides, most PSU banks having undertaken
restructuring are further susceptible to deterioration in asset quality.
Credit growth moderates, yet remains healthy: We expect FY12E credit
growth to moderate in sync with the RBI expectation to 19%. Current credit
growth (June 17, 2011) figure of 20.9% is pretty healthy as it is over and above
last year’s telecom outlay disbursals. Deposit growth, on the other hand, is
catching up fast as rates offered on term deposits by banks are more than those
offered by other saving instruments like NSC, post office, PPF, etc., With current
deposit growth at 18.3%, the gap between credit and deposit growth has
significantly reduced. We expect deposit growth of 18% for FY12E, which is 1%
above RBI’s expectation of 17%. CDR at 74.9% provides limited scope for further
expansion.
Concerns over contraction in NIMs overdone: We expect NIMs to contract ~10
bps on the back of 50 bps increase in saving deposit rates and contraction in CASA.
The country’s biggest lender, SBI, plans to focus on protecting NIMs and slowing
down credit growth due to capital constraints. The country’s largest private lender
ICICI Bank is also not targeting a very high growth. These developments at two of
India’s largest lenders augur well for other banks as a relatively less competitive
environment will help them in protecting their NIMs.
Credit costs to come down: We expect some amount of pain in asset quality,
though, by our estimates slippages of PSU banks will be slightly lower than FY11
levels, which included one-off on account of system-based recognition of NPA of
large loans. We have factored increase in slippages for private banks. With RBI
having somewhat relaxed the 70% provision coverage norm for banks, the lenders
are expected to use the concession as a cushion to reduce their credit cost.
However, both higher than expected slippages on system-based recognition of
smaller loans and a slowdown in the economy continue to pose significant risk to
the sector