Recent run up in share prices, as well as near-term concerns over margins & asset quality, could prove to be an overhang.
After beating the broader markets in the last one year, banking stocks have gone ahead and significantly outperformed in the last one-and-a-half months. Against the Nifty’s gain of about four per cent since the beginning of July, the Banking index has risen over 17 per cent — many banking stocks are trading at life-time highs.
The trigger came from two fronts. Namely, better-than-expected June quarter results, and the implementation of the base rate regime. A majority of banks posted robust top line and profit growth, aided by stable to better net interest margins (NIMs) and lower costs, even as there was limited support on the treasury income front. With bond yields becoming stiff, treasury income comfort would be limited for banks in the near-term. Public sector banks (PSBs) like Union Bank and Bank of Baroda would, thus, have to depend on core operations to boost profitability.
| STEADY GROWTH | ||||||
| EPS (Rs) | P/E (x) | P/BV (x) | ||||
| FY10 | FY11E | FY10 | FY11E | FY10 | FY11E | |
| PUBLIC BANKS | ||||||
| SBI | 167.0 | 186.0 | 16.8 | 15.1 | 2.6 | 2.3 |
| PNB | 120.0 | 141.0 | 9.9 | 8.4 | 2.3 | 2.0 |
| Bank of Baroda | 71.0 | 92.0 | 11.7 | 9.0 | 2.3 | 1.8 |
| Bank of India | 38.0 | 46.0 | 12.3 | 10.1 | 1.9 | 1.7 |
| Canara Bank | 71.0 | 73.0 | 7.6 | 7.4 | 1.7 | 1.4 |
| PRIVATE BANKS | ||||||
| ICICI Bank | 37.0 | 46.0 | 27.4 | 22.0 | 2.3 | 2.2 |
| HDFC Bank | 66.0 | 89.0 | 33.8 | 25.1 | 4.9 | 4.0 |
| Axis Bank | 61.0 | 76.0 | 22.3 | 17.9 | 3.5 | 3.0 |
| E: Analyst estimates | ||||||
Also, the new base rate mechanism restricts banks to lend below their benchmark rate, while the higher cost of deposits could impinge on margins. In totality, experts expect banks to face some profitability pressure in the current and next quarter. This could reflect on their stock prices, which longer-term investors could use to buy sound banks.
Near-term hitches
While the operating performance of banks in the June quarter was good, slippages on the asset quality front marred the show to an extent. According to an IDFC report, although total slippages were largely stable on a sequential basis, these were up 20 per cent year-on-year to Rs 92,192 crore in June quarter.
This was largely driven by slippages in their restructured portfolio; PSBs like Bank of India and Union Bank observed higher slippages in their restructured portfolio. In the next two quarters, slippages from the restructured assets would be a key monitorable as loans restructured a year ago would come out of RBI’s moratorium. Their impact on bank’s earnings, however, may not be significant.
CARE Deputy Managing Director Rajesh Mokashi says: “The extent of increase in non-performing assets (NPAs) is not alarming; we expect restructured assets getting converted to NPAs to be lower than initially expected. Other pointers, like interest rates rather than asset quality, would have a higher impact on earnings in the future.”
Traditionally, the June quarter is a dull quarter for credit growth.
Excluding ICICI Bank, loan books of the other bigger banks grew robustly at around 25 per cent, aided by credit to telecom companies for 3G. But deposit growth did not keep pace, pushing up the credit-deposit ratio to 73 per cent, compared to 68 per cent a year ago.
With liquidity in short supply, deposit rates have started to inch up. Many banks may have started increasing lending rates, but the quantum increase in lending rates come with a lag and is lower than the rise in deposit rates. Coupled with the increase in savings deposit costs, there could be a short-term pressure on net interest margins in the September quarter.
Positively, for the full year, experts suggest NIMs for banks would average at around 2009-10 levels in the current fiscal.
The road ahead
A fall in the treasury income, pressure on margins and probable fallout of r estructured assets could have a hangover on banking stocks in the short term. Emkay Global’s analysts wrote in a recent report: “We expect short-term pressure on NIMs and slippages in Q2FY11 (second quarter of the 2010-11), driven by bottoming out of cost of funds and high restructured assets, respectively.”
Apart from these glitches, an improving economic and investment outlook should lead to better credit demand from infrastructure, retail and industrial segments. While loan growth had slipped to a low of about 10 per cent in end-2009, it has been inching up and is around 20 per cent. Bankers suggest that loan growth could average at around 20-22 per cent for the current fiscal.
While lower treasury profits could impact public sector banks compared to private peers in the short term (10-year G-Sec yields are up about 30 basis points year-on-year), the recent good results, improving core business and relatively lower valuations could help public sector banks cover up in the second-half.
Positively, despite the recent sharp run-up in share price of PSBs, they continue to trade at a significant discount to private peers (see table). Hence, expect this valuation gap to narrow in the second half of 2010-11. Among stocks, investors could consider ICICI Bank on dips. The bank has largely cleaned up its balance-sheet, shored up its CASA (current and savings account deposit) ratio to 42 per cent and is now aiming to grow robustly. Among PSBs, Bank of India, PNB, SBI and Union Bank could be considered on dips.
