Banking - Prefer PSU Banks over Private Peers - Karvy

Decline in Pace of Deterioration Suggests an Early Signs of Revival: Most banks under our coverage have shown resilience in further deterioration in asset quality in second quarter, while the slippages of most banks remained in line with our estimates. Second quarter also proved to be healthy in terms of recovery / up-gradation for most PSU banks. Meanwhile, the trends of Q2FY14 numbers indicate an early signs of revival with pace of deterioration coming off significantly. The private banks continue to show a healthy trend backed by retail asset which has yet not shown any significant deterioration. However, we are of the opinion that with significant slowdown in the economy along with major retail segments like automobiles and mortgage, markets are not adequately factoring likely slippages from these segments.

Healthy Pace in Business Grows & Positive Surprise on NIMs Front: Most banks grew their balance-sheet at decent rate, except for PNB as per its prestated strategy on consolidation mode. Despite the RBI's liquidity tightening measures and consequent rise in cost of short-term fund, the banks by large were able to protect their margins against our estimates of sequential deterioration of ~10-15bps.

Liquidity has eased significantly: With currency back to its normalcy and RBI reversing its temporary moves, liquidity has significantly eased into the system. Net repo volumes along with MSF volumes have also eased down. Banks have accumulated over Rs2tn in FCNR window thereby pushing creditdeposit ratio to more comfortable levels abating any liquidity risk.

Restricted Capital Burning: Capital burning was limited for most PSU banks except for BoB (at 39 bps in Q2), while it rose by 41bps for BoI's due to issue of Tier-II (Rs. 15 bn) in Q2. HDFC Bank & ICICI Bank have seen higher capital burning of 90 bps & 50 bps, respectively, while ING Vysya seen 416 bps rise due to equity issue of Rs. 18.4 bn. Though the Government has announced capital infusion for PSU banks in FY14, we believe that such an infusion is unlikely to drive the Tier-I capital adequacy ratio of PSU banks by more than ~30-40bps.

Non-Interest Income Remains Lackadaisical - Treasury a Dampener: Banks' performance on Non-Interest Income front remained lackadaisical mainly due to lack of support from treasury income amid lower transaction-related fee income. Most of the banks availed the RBI relaxation to transfer securities from AFS category to HTM category at yields prevailing on July 15, 2013 and saved themselves from huge MTM hits. The RBI's relaxation to spread loss on their remaining AFS/HFT books will impact PSU Banks over next two quarters.

Valuation - Widening Gap between PSU & Private Banks: Rolling one 1-Year Forward P/ABV for private banks at 2.2x is close to its last year levels of 2.3x, whereas for PSU banks it has corrected from 1.3x to 0.8x. Thought the private banks have done well so far on asset quality, we feel their heavy-weighted retail book is yet to be seasoned. With recent sharp spike in valuations we recently downgraded Axis Bank & BOB to 'SELL'.

Source : Equity Bulls

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