BFSI - Sector Initiation - Between rock and a hard place :Centrum

Between rock and a hard place



We believe that the recent outperformance of the banking sector could
prove illusory in 2014 as the impact of adversities get more
pronounced; structural rigidities resulting in higher rates remain
stubbornly sticky, uncertainties of an election year bite, recovery in
credit quality proving to be protracted, and heightened regulatory and
government oversight lead to further cracks. A stagflation-like
scenario coupled with large capital requirements at low valuations is
unlikely to be of sustainable shareholder value. We prefer select
private names – ICICI Bank, DCB Bank and City Union Bank.  We also
prefer housing finance to asset finance. Among stocks covered,
initiations are on GIC Housing Fin, HDFC Ltd, PNB, DCB Bank, Shriram
Transport Fin and Mahindra Finance.



$ Liquidity concerns to prevail; high interest–high costs make the
down-cycle deeper:  Even as a high inflation-high government debt
combo perpetuates high rates, unlike other cycles, the banking system
is not able to counter that with high lending rates due to subdued
growth and fear of further adverse impact on credit quality. In
addition, the apprehension of higher wage costs in this climate will
increase in the coming months as the PSU wage settlement nears. Too
many stars need to be aligned to get out of this complex web of
negatives.



$ Efforts towards stabilizing credit quality underway, but upside is
capped: Reform measures across the stressed sectors, de-leveraging by
corporates have made many believe that the recovery process is
underway. Interactions with experts, analysis of NPA trend however
point to a feeble uptick and thereby expect systemic slippage ratio to
inch to 3.1% for FY14. Impairment ratio has been on the rise and
warrants capital infusion on a more frequent basis. The lag effect of
substantive restructurings done till FY13 along with the regulator’s
belated resolve to end putative frivolities in asset classification
could mean that the pressure continues.



$ Housing finance to outscore asset financing companies: Growth
visibility given favorable sector dynamics, ability to maintain decent
spreads and limited asset quality concerns provides comfort in the
housing finance space. On the other-side, valuations of asset
financing companies do not seem to factor in growth moderation, margin
pressures due to sticky interest rates and increased credit cost, this
being akin to corporate lending which is under stress compared to pure
retail.



$ The much-discussed PSU-private divide is unlikely to reverse as the
enabling conditions that led to prior, brief incidents of reversal are
not in place. Prefer ICICI (BUY, TP Rs1,250) to Axis (HOLD, TP
Rs1,150). In mid-caps, we like City Union Bank (BUY, TP Rs63) and DCB
Bank (BUY, TP Rs70). Retain a negative view on PSU banking space and
asset financing companies: SBIN (HOLD, TP Rs1,620), PNB (HOLD, Rs590),
SHTF (SELL, TP Rs560) & MMFS (HOLD, TP Rs280). We also initiate on GIC
Housing (BUY, TP Rs150) and HDFC (HOLD, TP Rs860). A sharp retracement
of rates remains the key risk to our call.





Thanks & Regards

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