Earnings growth slowing for banks

We see banks' overall earnings growth slowing to 14% year-on-year with public banks growing 12% y-o-y (ex-SBI by 7% y-o-y) and private banks 19% y-o-y as revenue growth is slowing and overall provisions are high. We believe interest rates are unlikely to decline sharply, stress on the balance sheet is yet to peak as we see impairments from infrastructure, and revenue growth may be challenging.

We believe the recent run-up in prices of financial stocks, especially banks, is an attractive opportunity to reduce exposure. We downgrade Punjab National Bank (PNB) to Reduce (from Add) and Oriental Bank of Commerce (OBC) to Add (from Buy). We downgrade HDFC Bank to Sell (from Reduce) as we find valuations expensive at 3.6x (times) book value and 18x FY2014e EPS. We see RoEs (return on equity) of 18-19% and earnings growth of 25% CAGR over FY2012-14e. Further, we revise our target price for HDFC Bank to R580 from (R575 earlier). On the other hand we like ICICI Bank, Federal Bank and SBI at current levels despite limited upside.

Asset quality pressure to continue: We expect fresh loan impairments (slippages and restructuring of loans) at elevated levels in Q2FY13. Retail-focused banks could probably see a marginal rise in NPLs (non-performing loans) but the focus would continue in the non-retail loan dominated portfolios in which we expect slippages to stay high, especially SME and mid-corporate loans. However, fresh restructuring is likely to be relatively lower than the previous quarter as we don't expect large restructuring from the SEB (state electricity board) portfolio across banks (50% have already been restructured), especially with the restructuring package just being announced.

Recovery trends will marginally improve sequentially as the focus has shifted to strengthening the balance sheet. We maintain a fairly cautious outlook about asset quality and expect overall loan-loss provisions to remain elevated (20% y-o-y). Public banks would be relatively lower (16% y-o-y) as the movement towards a stringent NPL recognition platform peaked in Q2FY12 resulting in significantly higher provisions.

... contd.

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