Banks surprise, worries remain

While lower funding costs have aided margin expansion, which looks difficult to sustain, asset quality and provisioning trends are among the key monitorables.

While most large banks, both from the public as well as private sector, outpaced the Street's expectations for the December 2010 quarter, expansion in net interest margins (NIMs) was the key takeaway. The positive surprises have seen the BSE Bankex index do some catching up, post its underperformance recently, consequent to fears over margins and asset quality.

However, while the surging cost of funding could restrict margin growth for the sector, higher provisioning for public sector banks like SBI could put their profitability under pressure going forward. Experts, though, suggest that most of the near-term concerns are priced in stock valuations, indicating a limited downside.
 

ROBUST PERFORMANCE
mIn Rs cr	SBI	ICICI Bank	Axis Bank	PNB	BoI
NII	9,049	2,312	1,733	3,203	1,987
% chg y-o-y	43.0	12.3	28.5	44.8	33.0
NIM (%)	3.6	2.6	3.8	4.1	3.1
chg in bps y-o-y	84.0	--	-19.0	50.0	50.0
chg in bps q-o-q	18.0	--	13.0	7.0	30.0
Total Income	12,364	8,445	2,881	4,061	2,635
% chg y-o-y	27.0	8.8	23.0	32.7	27.5
Net profit	2,828	1,437	891	1,090	653
% chg y-o-y	14.0	30.5	35.9	7.8	61.0
P/BV (FY12E)	2.0	2.2	2.5	1.5	1.4
E: Estimates                                                               Source: Company, Bloomberg

NIMs: Big surprise
The biggest surprise in the December 2010 quarter was the handsome NIMs witnessed by banks. As against expectations of NIMs trending downwards after the September 2010 quarter, most major banks (which have declared their results so far) with the exception of Axis Bank have posted an improvement in their margins on the back of higher yields on advances (and investments) along with a stable cost of funds. The latter was aided by a stable to higher share of low-cost CASA deposits. In SBI's case, its CASA ratio at 48.2 per cent (42.9 per cent in the year-ago quarter) is among the best in the industry, while ICICI’s CASA share jumped to 44.2 per cent as compared to 39.6 per cent in the December 2009 quarter, helping it sustain NIMs.

In future, though, most analysts expect NIMs of these major banks to decline due to the lagged impact of deposit re-pricing. Says Vaibhav Agarwal, banking analyst at Angel Broking, “NIMs of banks are expected to be under pressure for the March 2011 quarter as well as in FY12.” Jagannadham Thunuguntla, strategist and head of research, SMC Global, says, “Key pressure points for banks include tightening provisioning norms and higher NIM pressures.”

Asset quality: Mixed trend
On the asset quality front, the December quarter was a mixed bag. While SBI’s slippages (incremental NPAs, including one-offs) surged for the third consecutive quarter, analysts believe its asset quality is improving and will aid in lowering the credit costs going forward. BOI saw a significant improvement in asset quality with slippages falling to 0.9 per cent from over 1.5 per cent in the first half of this financial year, aided by the recovery of bad loans (more than double). Analysts expect the slippages to hover around 1-1.3 per cent for BOI. PNB continued to witness weakness in asset quality as its net NPAs increased to 0.72 per cent from 0.48 per cent in Q3-FY10. For ICICI, the net NPAs declined to 1.16 per cent from 2.19 per cent a year ago.

A key concern for the public sector banks, however, comes from the RBI mandate for implementing a system-based NPA recognition method by March 2011, which could restrict the earnings growth in the current quarter. Pension liabilities could also put profitability under pressure for major banks.

Loan growth
In the quarter ending December2010, banks registered healthy growth in the loan book, with Axis Bank being the leader (up 46 per cent year-on-year) and ICICI Bank the laggard (15 per cent growth). However, analysts believe this growth could moderate going forward due to a slower pick-up in industrial activity.

Outlook
In the last three months, the BSE Bankex has underperformed the Sensex, reflecting macro concerns and apprehensions on NIMs. The December quarter results have alleviated some of these concerns. Among stocks, while SBI’s upcoming Rs 20,000-crore FPO could provide a trigger to the stock, higher provisioning and asset quality are among the key monitorables. For BOI, analysts expect the bottom line to grow at 36 per cent the CAGR over FY10-12. Higher provisions and deteriorating asset quality would weigh on the PNB stock in the medium term, while the improving asset quality has been a positive for ICICI Bank. Broadly, analysts are cautiously optimistic on the sector due to near-term headwinds — with SBI and ICICI Bank figuring among their top picks.