INDIA BANKS It’s a U- not a V- shaped recovery ::Barclays Capital

INDIA BANKS
It’s a U- not a V- shaped recovery
We maintain our view that FY13 will be another tough year for the banking sector.
The macro environment is likely to remain difficult, particularly in contrast to the
sharp recovery of FY10. Credit quality trends are unlikely to improve sharply as
industrial production is particularly weak, corporate leverage is high and the power
sector is likely to require restructuring. Growth is likely to remain moderate as
investment activity remains sluggish and an inflation-fighting RBI restrains
monetary growth. On the revenue front, we expect fee growth to remain moderate
and we see some downside risk to NIMs. We have 1-OW ratings on SBI, HDFC and
IDFC and 3-UW ratings on Yes Bank and Bank of Baroda.

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Macro context – a slower recovery and potentially a “lower normal”: Limited fiscal and
monetary flexibility imply that the current slowdown is likely to be more prolonged than
the previous one. In the current cycle (in contrast to the previous cycle), the government
was running a large deficit even at the boom stage, limiting fiscal flexibility in the
slowdown. Furthermore, inflation and inflation expectations have proved stickier, limiting
room for monetary easing. Moreover, unless the savings rate recovers, the ‘normal’
growth rate may be lower (and real interest rates higher) than in the FY06-FY08 boom.
Credit quality trends unlikely to improve sharply: The slowdown is particularly deep
in the industrial sector, which comprises 45% of bank credit, and leverage among a
concentrated set of borrowers remains high. Credit quality issues in private generation
should start impacting banks in 2H FY13 as plants face fuel shortages. In the previous
downturn, credit quality trends remained weak even as the economy started
recovering; rating agencies also expect it to remain weak for a “few quarters”.
System growth forecast to remain sluggish: Investment activity remains sluggish and
the drop in new project approvals implies that credit growth will remain moderate
medium-term. Recognising the need for monetary restraint, the RBI projects a
continued period of modest system growth (deposit at 16%, credit at 17%).
Fee growth should remain moderate; some downside risk to spreads/NIMs: We
expect fee income growth to remain below asset growth (as in FY12) as loan approval
activity remains slow. We forecast spreads to remain broadly flat as competitive
conduct is likely to remain rational – but there is some downside risk to this forecast.
Top picks – strong liability franchises: SBI and HDFC Bank, the banks with the best
CASA ratios within our coverage, are our top picks. We raise our PT for HDFC Bank as
we roll forward its valuation. We also rate IDFC a relatively low-risk infra play, 1-OW.