JPMorgan, India financials FY14 - be defensive

We retain our preference for private banks in India; however, we shift our
preference to quality names with strong deposit franchises and resilient
asset quality. We see the economy in poor shape for the next six months –
and any recovery is likely to back-ended in FY14. We cut PTs on SBI,
Axis, ICICI, IDFC, Yes, PNB and BOB to reflect the near-term challenges
to the sector on asset quality. Our top picks are now HDFC, HDFC Bank
and Kotak.
 Changing drivers. We think the weak economy will be the key
overhang on the sector in the near term. There are no definitive signs of
a recovery and we see pressure on banks’ revenues and credit costs.
Asset quality is the key risk and we see some of the pain now spilling
over the private banks, via some retail stress and infra loan restructuring.
 Wholesale private banks – near term pain. We think wholesale private
banks will face some pain in FY14. Retail asset quality is likely to turn
worse, though the impact of credit bureaus should mitigate the pain
significantly. The momentum of restructuring in the wholesale space
should accelerate over the next two years – it’s hard to pinpoint exactly
when. On a longer term basis, the stocks are attractive – but the near term
pain worries us.
 PSU banks – too early to buy. While valuations are now undemanding,
we see continuing asset quality stress for PSU banks capping stock
performance. Recoveries may accelerate as the banks seem to be getting
tougher with defaulters but we think the overall asset quality stress will
get worse before it gets better. We maintain our negative stance.
 Risks to our call. The trend has already set in so we are risking a short
term reversal of the “defensives” trade. We would use any short term
rally to switch into the defensive stocks

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