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Banking

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m  Macro data - growth weakness continues:  Not withstanding the improvement in general sentiments, ground realities are yet to change for the better. The trend in inflation only reinforces the weakness in aggregate demand with WPI dipping below the 5% mark and CPI easing by 120bps MoM to 10.24% in April’13. The near term growth outlook remains challenging as reflected by the deteriorating trend in OECD’s lead indicator index for India. However, on a positive note the pace of MoM decline has slowed in March’13, providing some hope that the government actions in recent months may gradually yield results.
m  Ditto for banking: Charting similar lines, banking data too suggests challenging operating environment. The broad moderating trend in credit growth remains intact with 14.6% growth as on 17th May’13. This, along with stability in deposit growth around 13.5% level, implied a much narrower funding gap leading to easing in CD ratio. We expect the easing in CD ratio to continue through H1FY14. LAF has narrowed down to less than -1% of NDTL, which we expect to sustain  during large part of H1FY14. In turn, this should keep the CD and CP rates (currently at mid-2010 levels) under check. That said, expectations of repo rate cut at the next policy meeting has dimmed, despite WPI in comfort zone and weak IIP growth, as Re continues to depreciate (widening trade deficit, portfolio outflows etc) thus adversely impacting India’s ability to control imported inflation.
m  Sectoral credit deployment data for April’13 suggested credit growth picking up across sectors compared with Mar’13, except for services. Interestingly, dissection of industry sector credit reveals that credit growth for large borrowers continues to come off (likely de-leveraging) while credit growth momentum for micro, small and medium sized borrowers has gained traction (possibly longer WC cycles).  Industry credit demand is highly correlated with IIP growth, which leads us to believe that moderation in industry credit growth may be nearing its bottom as IIP growth has stabilized in recent months with initial signs of pick up. Probably led by removal of hurdles facing project implementation, credit exposure to infrastructure sector continues to rise as past sanctions come up for disbursals. Notably, power sector exposure has gone up from 8.5% in March’13 to 8.9% in April’13 and forms 57.3% of infrastructure sector exposure (from 54.3% 6 months ago).
m  Private banks outperform: In line with divergence in the Q4FY13 earnings performance, most PSBs underperformed the Bankex in contrast to outperformance by most private banks under our coverage except Axis Bank. The sustained asset quality challenges faced by PSBs continue to keep investor interest firmly in private banks with strong retail focus. We maintain our preference towards private banks. Top Pick: ICICI Bank – Improving return ratios with healthy NIM outlook and manageable asset quality risks.

Thanks & Regards, 

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