The summary: Still very mid-cycle Indias banks remain fundamentally verrry mid-cycle. Most recent trends however suggest some cyclical tweaks and swings: (i) BS---asset-quality cycle is getting a little stretched; its now three quarters to the bottom; (ii) P&L - Revenues looking up!, Costs making a difference and (iii) Elections - are a play, opportunity/risk ahead. Stay neutral, its going to be up & down, and Axis/ICBK are our top picks.
The BS: Weaker Asset qualitys getting a little stretched: deterioration stays high (6% annualised slippage for PSUs), restructurings rise (scale, pipeline, average size), and management commentaries remain cautious. Its probably another three quarters to the bottom, theres no V aheadits going to be a stretched U, and loan growth would remain sub-15%. You have to be patient with Us.
* The P&L: Better Its surprisingly looking up: PPP (ex-trading) +7% q-o-q with higher margins (a tad), rising fees and a mixed cost show. While offset by BS costs (PAT -5%, credit costs +18% y-o-y), banks are showing some pricing power and discipline. Its however split on costs: Private banks cyclically offsetting revenue slowdown through costs; PSUs counter-cyclically (or out of control) offsetting revenue ups with high costs. The P&L slightly offsets BS: but will it have leverage on the turn
* The Spice: ElectionsThe banks are a big play: historically (high beta), economically (cycle is low expectation swing could be large), and individual stock/business leverage wise. We would expect PSUs (PNB/SBI) followed by Axis/ICBK as most sensitive to a risk on, and HDFC/HDFC Bank the best hedges against a risk off. The election build-up should swing bank stocks beyond their businesses.
* The stocks We stay neutral on the sectorbelieve the Mid-cycle fundamentals will keep valuations largely around means: environment/market swings would offer opportunities for those looking for trading ideas. Prefer privates to public, banks to NBFCs, and Axis/ICICIC Bank are our top picks.