Banking - Asset quality to remain key focus area - Q2FY13 Results Preview - Centrum

Asset quality trends (incremental restructuring and slippages) will continue to dominate the attention of investors in Q2FY13 as well. Relatively higher provisioning cost for PSBs led by slippages and incremental restructuring should lead to continuation of the divergent earnings performance trend among private banks and PSBs. HDFC Bank & ICICI Bank should lead the large caps while SIB & KVB should fare relatively better among small cap private banks. Among PSBs, BoI and UBI should report strong bottom-line growth helped by a distorted base.

- Asset quality: no respite in sight: Weakening economic activity and resulting stress in loan book should continue to manifest itself in the form of substantial incremental restructuring and slippages over next couple of quarters. Already, a staggering Rs370bn worth of debt has been referred to CDR for restructuring during YTD FY13. Our channel checks suggest that the pace of incremental restructuring is unlikely to ease materially during FY13 given the pipeline (SEBs, textile and other large ticket cases reported in media). In line, the trend in slippages too is likely to remain high over next few quarters as we do not see any reason for revival in economic activity in the near term (despite reforms announced by the government lately). The rating upgrade and downgrade trends reinforce our cautious view on asset quality.

- Mixed NIMs QoQ, but cracks appearing: Given the strong pricing power aided by tight liquidity for large part of the quarter, we expect NIMs to remain flat sequentially at the aggregate level. The benefit from easing in wholesale rates is likely to be offset by lower CD ratio and contraction in loan yields as most banks had tweaked lending rates during the quarter. Individually, private banks should be able to maintain NIMs stable sequentially, while PSBs could report a mixed bag performance. BoI and UBI could surprise positively by reporting QoQ expansion in NIM while negative surprises (led by reversal of past income due to slippages) cannot be ruled out for other leading PSBs. Importantly, we expect credit growth to sustain at current level (~16% YoY for FY13) despite the typical seasonal pickup in credit demand. Against this, the deposit growth rate continues to hold up well around the current level (~15% YoY) which implies weakening pricing power for banks on the lending side. Consequently, we expect the deposit rates to ease further as banks try to create room for lowering lending rates.

- MTM write backs cushion unlikely: With the g-sec yields at the end of the quarter largely mimicking the levels at the end of Q1FY13, banks (especially PSBs) are unlikely to materially benefit from write-back of MTM provisions made on investments (as was the case in Q1FY13). While the distorted base (BoI, UBI & SBI) will help PSBs report a healthy 20% YoY growth in bottom-line, on a sequential basis we expect a 2% contraction.

Source : Equity Bulls

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