Prefer private banks; upgrading ICICI Bank ::Nomura research

Retail spend robust; private
banks better leveraged


The asset-quality hangover
Asset quality will separate the winners from the losers in the Indian
banking sector in the current cycle, in our view. We have seen relatively
higher NPL formation in the PSU banks than that in the private sector
banks, and we identify several reasons why the bad loan hangover will
persist for the PSU banks: relatively higher exposure to GNPL ‘heavy’
sectors, relative disadvantage in GNPL 'ageing' structure and low ex-loss
asset provision cover. We also highlight the activity at the corporate debt
restructuring cell.

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 Corporate spending cycle - We update our earlier work on the
corporate capital spending cycle. The RBI's latest data indicate that the
aggregate project spending intended by corporate India has declined by
46% y-y in FY12. We have analyzed the capex cycle for 384 large
companies across several sectors and sector-wise capex spending
patterns definitely corroborate the macro slowdown story.
 Retail spending cycle - In contrast to the slowdown in corporate
investment spending, we find retail consumption spending still robust
and trending strongly. We analyze credit card and debit card transaction
data across the PSU and private sector banks and we believe that the
private sector banks continue to hold the edge over the PSU banks in
their being able to leverage this strength in retail consumption.
 Prefer private sector banks over the PSU banks - We have a Reduce
rating on the PSU banks for the possible asset deterioration they are
likely to face over the next several quarters. We prefer the private sector
banks due to their relatively cleaner loan books, more favourable
delinquency-to-recovery trends, and better capital cover, which ensures
a more stable earnings trajectory than that of the PSU banks.
 Upgrading ICICI Bank to a Buy from Neutral - New TP INR1,165 – in
our view, ICICI will be relatively better shielded from the asset-quality
deterioration that we expect in the Indian banking sector. We now expect
the ROE (on the best capital base in the system) to increase to 15%
(consolidated) by FY13F, driven by expanding NIM, decreasing LLPs
and as capital returns from the subsidiaries.