[T.S.R:17995] Slippages Mount, NPAs Rise-Sell PSU Banks (ICICI Direct)

The plot has thickened for banks that have faced the brunt of the RBI

increasing its policy rates 12 times since March 2010. Even though the RBI

is hawkish and is willing to sacrifice economic growth to anchor

inflationary pressures, banks have endured enough. Credit growth in the

year to date has remained muted at 3.4% and continued slowdown for the

next two quarters may impact expected credit growth of 18%. Margins

have taken a hit and as the pain period gets prolonged we see asset

concerns pressurising book value, thus depressing valuations even further.

The sector is in the doldrums with the Bank Nifty correcting ~20% with

certain stocks correcting by 40-50% since January 2011.

We believe banks, especially public sector banks (PSBs) with high

exposure of 20-25% to infra (40% CAGR over FY09-11), power (47% CAGR

over FY09-11), textiles, SMEs, etc. may face higher slippages. Moreover,

banks with larger restructured portfolios like PNB (6.5%) IOB (5.7%), etc.

could suffer incremental delinquencies from the same. Private sector

banks are relatively better off with lower infra exposures of 10-15% of loan

book. Since the risky exposure is primarily to corporate sector unlike the

spike in retail NPA seen in FY09, we prefer private banks over PSBs.

We have downgraded the target multiples for majority of coverage banks

by 15-20% in light of declining profit estimates, RoEs or rising NPA

concerns as their exposures to risky sectors remain high. Valuation P/ABV

multiples may stay at lower levels for an elongated period as corporate

recovery may take longer than the previous cycle implying bank stocks

could be subdued for a longer time.

We are neutral on public sector banks and overweight on private sector

banks.

We continue to recommend large retail franchise and stable asset

quality banks like HDFC Bank in the private space. Among PSBs, we like

Bank of Baroda with stable asset quality, margins and growth visibility.

A risk to our call would a reversal of the interest rate cycle if it commences

in the near future or is faster than anticipated.

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