Banking Monthly: The Big Picture - Dull underlying story, high hopes and not-so-cheap valuation – then why the optimism? - BRICS

CNXBANK has continued to outperform CNXNIFTY (broader market) even after we turned neutral/cautious on the sector on September 17, 2012, up 13.6% and 5.1% during this period. YTD gains in CY12 for CNXBANK was 56.1% vs. 27.2% in CNXNIFTY. In the last 30 days, UNBK, BOI and BOB were the top three gainers, while HDFCB, KMB and FB were the laggards.

We continue to re-emphasize our neutral stance on the sector based on four simple premises – pressure on NIM, limited upside in loan growth, higher provisioning for both asset quality and wage revision of PSU banks and not-so-cheap valuation. First, NIM will come under pressure as lending rates fall faster than overall cost of funds, accentuated by a fall in CD ratio, with the RBI cutting rates and infusing liquidity to ensure pass through. A return of risk aversion, with banks diverting greater liquidity towards G-Secs, will be an additional headwind. Second, tepid industrial loan demand and weaker prior capex sanctions is unlikely to lead to a turnaround in loan growth expectations and consequently, unlikely to offset the slowdown in NII due to lower NIMs. Third, asset quality remains a concern. In addition, PSU banks will build a buffer for wage hikes. Lastly, banking stocks are no longer cheap and trade at par with their 2/5 year averages, even as the P/E discount to the broader market has narrowed further. We prefer to stick only with the larger names and niche players. HDFCB, ICICIBC, AXSB, BOB, SBIN and MMFS remain our preferred picks.

Insurance – Weakness persists: Cumulative APE growth in April-October 2012 fell 8% yoy, driven by a decline of 11.7% yoy in LIC's collection, while private players' collection remained flat at 0.1% yoy. In October 2012, APE was down 9.7% yoy (private up 2.9% yoy and LIC down 17.1% yoy). On a rolling 12-month basis, the share of group premium came off the highs of 43%, while the contribution from individual-single premium to total individual premium held steady in the 26% range. While a sustained performance by the equity markets will help the industry push higher margin products, we believe the APE growth in FY13 could still be in the high-single to low-double digits. Mutual fund – Holding up better: YTD until November 2012, gross flow to AMCs were up 4.5% and net flows up 60.6% vs. FY12, although equities are seeing net outflows, with money moving to liquid and money-market funds. AuMs rose 3.3% mom and 16.4% yoy.

FII inflows remain vital for revival in Indian market: FII inflows hold the key to a sustained recovery in the Indian markets, but investors need to become comfortable with medium-term growth prospects and inflation needs to show clear signs of moderation. The Asian markets (India, Indonesia, Philippines, South Korea, Taiwan, Thailand and Vietnam) saw an inflow of US$9.51bn between Nov 12-Dec 14, 2012. FII inflows to India amounted to Rs726bn (YTD FY13) vs. inflow of Rs434bn in FY12, while outflows from domestic MFs stood at Rs140bn (YTD FY13) vs. Rs12bn in FY12.

Source : Equity Bulls

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