Narendra Modi's Washington test

Narendra Modi's Washington test

If Modi gets the world’s biggest power right, his pursuit of larger global goals...
Small banks or banks for ‘small’ people?

Small banks or banks for ‘small’ people?

Unless appropriate sub-limits are imposed on loans, there is a serious...

The asset quality stretch

Mar 10 2014, 03:44 IST
Comments 0
SummaryMid-cycle fundamentals will keep valuations largely around mean

Banks

Rating: Neutral

The summary: Still ‘very’ mid-cycle— India’s 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; it’s 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, it’s going to be up & down, and Axis/ICBK are our top picks.

The BS: Weaker — Asset quality’s getting a little stretched: deterioration stays high (6% annualised slippage for PSUs), restructurings rise (scale, pipeline, average size), and management commentaries remain cautious. It’s probably another three quarters to the bottom, there’s no V ahead–it’s going to be a stretched U, and loan growth would remain sub-15%. You have to be patient with U’s.

* The P&L: Better — It’s 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. It’s 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: Elections—The 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 sector–believe 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.

—Citi

Ads by Google

More from FE Special

Reader´s Comments
| Post a Comment
Please Wait while comments are loading...