While asset quality concerns are easing, sustaining growth in loans and profit margins in the near term could be difficult.
Banking stocks have done very well in the September quarter. Against the Sensex’s roughly 13 per cent rise, the BSE Bankex is up over 30 per cent since the end of June. This outperformance is partly due to expectations of a good set of numbers for the September quarter, which to a large extent has come true. Banks have delivered strong top line growth, aided by expansion in margins. However, some of these gains were offset by a rise in provisions, particularly in the case of public sector banks (PSBs). We take a look at the trend in the quarterly performance of the top banks (see table at bottom) and their outlook.
Robust credit growth, NIMs
Loan growth was broadly strong in this quarter — 28 per cent for PSBs and 30 per cent for private banks, both on a year-on-year basis. The retail and small and medium enterprises (SME) segments have picked up aggressively for the PSBs. Analysts, however, expect the banking sector to see some slowdown in loan growth in the coming two quarters, as they believe the across-the-board pick-up in loan growth is yet to gain traction. While demand from certain sectors like infrastructure has not yet picked up, the growth in corporate loans will also be keenly watched.
Net interest margins (NIM) improved year-on-year for most banks and boosted net interest income (NII) growth, particularly in some PSBs. It helped them offset the slower loan growth. On a year-on-year basis, NIM improved 59 basis points (bps) for PSBs and 16 bps for private Banks. HDFC Bank (at 4.2 per cent) and PNB (3.5 per cent) were the leaders in NIM in their respective groups. Again, analysts believe these levels of NIMs are difficult to sustain, and could slip by 10-15 basis points.
Provisions peaking, asset quality improving
While the provisions for PSBs like Union Bank (UBI; up 343 per cent) and PNB (up 139 per cent) surged significantly, those of private banks fell, with IDBI seeing the maximum fall (down 56 per cent). Given the RBI deadline of September 30, 2010 to meet the 70 per cent net non-performing assets (NPA) coverage threshold, banks like Bank of India and Indusind Bank witnessed a reasonable increase in provisions.
Asset quality trends as measured by net NPAs were stable, with the greatest improvement coming from private sector banks. ICICI Bank (80 bps reduction) led on this front, while UBI (100 bps expansion) was the laggard. Analysts say the restructured loan portfolio has come down in the quarter. They expect asset quality concerns to reduce in the second half of FY11 as recoveries should also accelerate a bit. Hence, concerns regarding NPAs will ease this financial year, barring some midcap PSBs which have problems in the agricultural debt portfolio.
| PRIVATE SECTOR BANKS | |||||||
| in Rs crore | NII | % chg (y-o-y) | PAT | % chg (y-o-y) | TTM P/BV (x) | CMP (Rs) | FY11E P/BV (x) |
| PRIVATE SECTOR BANKS | |||||||
| ICICI Bank | 2,204 | 8.30 | 1,237 | 18.90 | 2.80 | 1,231 | 2.70 |
| HDFC Bank | 2,526 | 29.20 | 912 | 32.70 | 5.10 | 2,347 | 4.30 |
| Axis Bank | 1,615 | 40.50 | 735 | 38.30 | 3.90 | 1,511 | 3.30 |
| IDBI Bank | 1,168 | 152.00 | 429 | 68.90 | 1.70 | 182 |
NA |
NA
NA
The aggregate net profit growth stood at 38 per cent for both private banks and PSBs. The profit growth for PSBs would have been higher but for lower other income and higher expenses. Operating expenses were elevated due to an increase in gratuity provisions.
Strong SBI numbers expected
SBI, scheduled to report its numbers on November 8, is seen to benefit the most amongst PSBs from a favourable base effect, with NII growing 30.7 per cent and the operating profit 31 per cent. However, the necessity of raising PCR (provisioning coverage ratio) to 70 per cent and higher marked-to-market losses are seen curbing the net profit growth to 15 per cent. The key concern for SBI could be the level of delinquencies, which analysts expect to remain at Rs 4,000 crore levels as in the June quarter. Margins are expected to remain strong and fee income growth good for the September quarter.
Valuations, outlook
Among individual banks, analysts expect around 25 per cent compounded earnings growth over FY10-12 for ICICI Bank. The stock is valued at two times its FY12 Price/Adjusted Book Value (P/ABV). While the current valuations of 3.7 times the FY12 P/ABV look unattractive, a stable outlook on the earnings and asset quality make HDFC Bank a good pick amongst private banks. The Axis Bank stock has run up recently and analysts believe it is fairly priced as of now.
Among PSBs, Bank of Baroda can report 22 per cent loan growth over FY10-13 and this will drive profits — its stock could trade up to 2.25 times the FY12 P/ABV from 1.9 currently (about 18 per cent upside). PNB is expected to deliver 21 per cent growth in loans over FY10-13 — its stock can trade up to two times the FY12 P/ABV, translating into an upside of 15 per cent.
ICICI Bank remains the top pick of most analysts as its loan growth and asset quality are expected to improve. In the PSB space, BoB and PNB are the most preferred stocks.
