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Leading private banks - ICICI Bank, HDFC Bank and Axis Bank continued to deliver good results as they met the street's expectations for the March 2013 quarter.
While loan growth and margins remained strong for all three players, fee income growth remained mixed (hit by muted activity on the project finance front).
Current valuations of the three banks seem to adequately capture in the positives of strong return ratios and higher profitability.
Notwithstanding expectations of good loan growth in FY14, managements and analysts continue to remain cautious on the asset quality trends for private banks.
“We believe that credit costs for the private sector banks pose a downside risk to our earnings growth forecasts. We are concerned around continuing asset quality risks stemming from the infrastructure sector - especially power”, says Krishnan ASV, Banking analyst at Ambit Capital.
HDFC Bank though remains better-placed given its diversified loan book.
“HDFC Bank continues to be our top pick in Indian financials. It has a well-diversified loan book, stable asset quality and among the highest profitability. We expect cost-income ratio to moderate further with stabilisation in branch network.
This along with steady NIMs and improvement in fee income growth would help pick up pre provisioning profit growth rate to 26% over FY13-15”, believes Ashish Gupta, Banking analyst at Credit Suisse.
For the March 2013 quarter, loan growth remained strong for the three banks at 14-22.7% over March 2012 - with HDFC Bank leading ahead.
This growth was driven by continued traction in the retail segment as working capital loans fuelled large part of corporate loan growth. Net interest margin (NIM) expanded for all three banks due to lower cost of funds.
ICICI Bank witnessed highest NIM expansion of 38 basis points to 3.1%. The bank expects to improve its margins by about 10 basis points in FY14.
Asset quality trends remained strong for the banks. However, managements remained cautious on asset quality trends in FY14. ICICI Bank's Gross non-performing assets (NPA) ratio fell to 2.68% versus 3.04% last year and 3.3% in the December 2012 quarter.
Restructured loans increased by 16% sequentially to Rs 5,315 crore, higher than expectations. ICICI Bank management believes the restructured assets could increase going forward and will monitor the asset quality closely. Axis Bank's Gross and Net NPA ratios have remained stable at 1.1% and 0.3% for the past four quarters (since June 2012), reflecting some stability.
However, restructuring doubled over the December 2012 quarter, indicating that asset quality concerns are not over as yet. Also, given Axis' highest exposure amongst peers to the troubled power, infrastructure and SME sectors, asset quality risks are likely to prevail, believe analysts.
“While slippages have been ticking down and recoveries up, the environment and Axis’ 15% SME loan mix plus its power sector exposure with 30% of operational projects remain key overhangs”, believes Sachin Sheth, Banking analyst at HSBC Securities & Capital Markets. He has a Neutral rating on the scrip.
HDFC Bank's asset quality remained fairly resilient with sequential fall in its Gross NPA ratio to 0.97%. Its restructured loans as a per cent of loan book, too, declined to 0.2% versus 0.4% a year back and 0.3% in the December 2012 quarter.
While management indicated some stress on asset quality in its construction equipment book, the segment is relatively small part of the total loan book to have any meaningful impact.
With robust Fee income growth of 22.4% over last year, Axis Bank led its peers. While HDFC Bank reported 10.8% growth in fee income, the metric grew by a muted 2.7% for ICICI Bank. Notably, ICICI Bank's fee income was hit by muted project financing related fees. Axis Bank, on the other hand, benefitted by strong growth in retail fees as well as treasury income.
