3FY2013 Banking earnings review PSBs performance continues to deteriorate
Key points
Earnings growth below estimate as PSBs report a weaker performance: During Q3FY2013, Sharekhan's banking universe reported an earnings growth of 8.5% year on year (YoY; up 4.6% quarter on quarter [QoQ]), which was lower than our estimate. The disappointing earnings performance by the public sector banks (PSBs; down 2.2 YoY) led by a subdued growth in the net interest income (NII) and higher provisions contributed to a lower growth in the overall earnings. However, the private banks continued to report a strong growth in earnings (up 27.4% YoY).
Operating performance weakens further: The NII of our banking universe came in marginally short of our estimate, again contributed by the PSBs, which reported a nominal growth of 2.9% YoY. The operating profit grew by 9.9% YoY with the PSBs showing a growth of 4.3% YoY and the private banks showing a growth of 23.3% YoY. The slower growth in advances and YoY decline in margins affected the NII growth, though a relatively higher treasury gains cushioned the profits.
Asset quality pressures remain: In Q3FY2013, the asset quality of the banks under our coverage deteriorated though the slippages were relatively lower on a quarter-on-quarter (Q-o-Q) basis. The restructured loans continue to mount for most PSBs due to stress in industrial sectors. However, the private banks were able to maintain the asset quality.
Outlook The slowdown in the economy has affected the banking sector in terms of a slower business growth and a rise in stressed loans. While the government has initiated the steps to revive the broader economy, the growth may pick up gradually and the recovery in the banking sector will also be gradual. Further, given the macro-economic issues around, the Reserve Bank of India (RBI)'s monetary easing could be slower than expected (about 75 basis points in 2013) which could affect the growth in the sector. We believe the stress on the net interest margins (NIMs) and the asset quality will affect the earnings growth of the PSBs while the private banks are expected to maintain the earnings growth and asset quality. We, therefore, maintain our positive bias for the private banks and remain selective on the PSBs. We prefer ICICI Bank (a strong growth and improved asset quality) and Federal Bank (improving earnings profile, attractive valuations) among private banks and State Bank of India (SBI; stable NIM, healthy capital position) and Allahabad Bank (recoveries to improve asset quality, attractive valuations) among the PSBs.
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