India Banks More Cyclical Than Structural Pain  Citi

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India Banks
More Cyclical Than Structural Pain
 Cyclical uncertainty, but structurally still sound — We believe Indian banks are in
the midst of cyclical pressure – macro driven, both global and domestic. While growth
and returns are likely to moderate, we do not believe these are structural (though
down-cycle could last longer than previously). Fundamentally, bank franchises, balance
sheets are robust – healthy growth, reasonable returns, adequate funding and capital.
 Uncertainties high, stocks correlated, vulnerable to global macro — Macro
uncertainties are high – especially global. Domestic pressures closer to peak (interest
rates, inflation) but recovery likely slow. Sector has corrected (down 28.6% from peak),
factors in some uncertainties; valuations (1.6x 1yr Fwd PB), however, still well above
troughs and we believe downside risks still outweigh potential upsides near term.
 Asset quality: top-down, bottom-up dichotomy — While pain is widely expected
(and partly priced in), underlying NPL trends still stable (higher PSU bank NPLs more
of carpet cleaning). We expect asset quality to remain mid-cycle (but an elongated
one), pain likely to be sectorally concentrated (not systemic) and deterioration gradual
(not sudden) – should limit sharp downsides (but also cap near-term upsides).
 Remain selective, cautious near term; but seek franchise driven opportunities —
We remain cautious near term (reduce earnings, target prices across stocks), but seek
selective, longer-term opportunities – stronger franchises with low relative valuations.
We upgrade: a) ICICI Bank (Buy from Hold) – consolidating franchise/operating
parameters, valuations well below peers (1.5x PB); b) Union Bank (Buy from Sell) –
relatively low infra exposures, valuations low (0.9x PB); and c) RCap (Buy from Sell) –
low valuations. We also downgrade: a) Kotak (Hold from Buy) – low risk exposures, but
strong relative outperformance caps upsides; b) Motilal (Sell from Buy) – structural
industry pressures, challenging recovery outlook.
 Preferred picks — Overall, we prefer banks over NBFCs (lower regulatory risks, more
attractive valuations), private banks over public (while valuations lower for PSU,
earnings/NPL comfort higher for private). Top picks – Axis, SBI and ICICI.