Financial Services Still remains a story of contrasting halves; Like Yes/MMFS:: Prabhudas Lilladher

Q2FY13 performance continued to remain a story of contrasting halves with
private banks/NBFCs surprising and PSUs disappointing, especially on asset
quality. Despite undemanding valuations and easing rate cycle, we prefer
ICICI/Axis as beta plays as PSU bank managements continue to sound cautious on
asset quality. Yes Bank and MMFS are our top picks among mid‐caps and we also
like old generation private banks despite the run‐up (J&K/ING/Federal).

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􀂄 All well for private banks, YES‐ Top pick: Private banks reported beat on 2Q13
PAT driven by robust margins and better-than-expected asset quality, especially
corporate banks. NIMs have held up or improved for most banks with ICICI, Yes,
ING surprising on margins. Corporate asset quality has also held up well despite
banks deciding to recognise Deccan and provides comfort on corporate
underwriting. Core fee income performance was mixed with Axis/Yes/IIB
surprising and ICICI/ING/Federal disappointing. Old generation private banks
reported strong overall performance excl. fees and we continue to like
J&K/Federal/ING and maintain cautious view on SIB.
􀂄 PSU banks ‐ Q2 performance does not inspire confidence; prefer Axis/ICICI
still: PSUs largely disappointed on asset quality (excl. Union) and that impacted
operating metrics as well. NIM performance was impacted by interest reversals
and core fee income was also muted. We had upgraded some PSUs from ‘Sell’
to ‘Accumulate’ rating in Q1FY13 but muted asset quality outlook from PSU
management and large restructuring pipeline restricts from taking a more
favorable view despite undemanding valuations and prefer ICICI/Axis still as
beta plays though risk-reward is less attractive now.
􀂄 NBFCs well placed but valuation challenges in a few; MMFS top pick: NBFCs
reported inline Q2 with stable asset quality and with easing rate cycle, we
believe, margins will likely improve. NBFCs have got re-rated over the last 4-5
months and with valuations having inched up, we have downgraded IDFC/ HDFC
to ‘Accumulate’ (in Q2FY13), but we still like MMFS as we see further upsides to
profitability due to improving margins and stable asset quality. Shriram's
valuations are reasonable but we remain marginally cautious on the CV cycle.
􀂄 Yes Bank ‐ Delivering on re‐rating catalysts: (1) Operating performance is
improving as fee income remains steady and margins have started to inch up as
wholesale rates ease and Yes remains one of the best plays on easing rates (2)
Low credit costs despite provision on Deccan provides significant comfort on
their corporate underwriting (3) Valuations are still reasonable at 2.1x FY14
book (w/o dilution) - Even with a dilution, ROEs will remain +19% and would
make valuations more attractive - 1.85x FY14 book .
􀂄 MMFS ‐ Momentum sustaining; valuations reasonable: (1) MMFS continues to
deliver on growth and CY13 being a pre-election year, Congress will not let the
rural-impetus to slow (2) With a large fixed rate book, NIMs will improve over
the next 2-3 qtrs (3) Management commentary remains sanguine on asset
quality and even feedback from CRISIL on Mahindra's tractor pools suggest
robust credit outcomes (4) ROEs despite the dilution will remain +20% and postdilution
vals at 1.9x FY14 book is very reasonable