Banking Q3FY12 Preview - A Quarter of Restructuring - MSFL Research

Grappling with a painful quarter behind, Indian banking sector is expected to deliver subdued performance in Q3FY12 with restructuring being the focal area. Slowing credit growth, weak macro economic conditions, relatively stable quarterly margins and higher restructuring proposals were the key highlights for the quarter. Given this background, we expect MSFL baking coverage stocks to deliver an average earnings growth of 9% y-o-y within which private banks will be clear outperformer with 19% growth as against PSB's growth of 5%.

Key highlights of Q3FY12

Banking sector – Concerns unlimited

The broader market indices corrected by 4% during the quarter as against the Bankex which fell by 13% on concerns ranging from slowing credit growth, asset quality to capital comfort. Weakening of the economic environment and higher interest rates has reduced the debt paying ability of various corporate. Further, with grim global outlook, many associated sectors are facing the heat. All these including delay in effective policy actions by government have raised serious concerns on growth as well as on the health of the Balance Sheets of the banks, given which the sector corrected sharply.

Credit slows down – As expected

Given the tightening stance of RBI, the credit growth YTD stood at 8% as against 12% last year though the headline credit growth numbers were in the range of 17-18% range. Deposits growth was too in the similar range though the pickup was largely in Term deposits and as such we should see muted CASA growth for the quarter.

Restructuring – the buzzword

Given the strain in various sectors, especially in the SEB space, there has been increasing proposals of rescheduling the loans. We have already seen few instances whereby certain SEB loans have been restructured during Q3FY12. Also, the number of cases referred to CDR has been strong at 17 with an aggregate amount of Rs.186bln. All in all, PSB's should be seeing their restructured book getting bloated for the quarter with incremental cases coming from SEB, Textiles, Iron & steel and Shipping space. However, recoveries could remain strong during the quarter given that many slippages last quarter were technical in nature and as such could arrest the asset quality deterioration due to higher slippages.

NBFCs – Growth as usual

NBFCs should continue with their good run with gold NBFCs reporting yet another strong quarter of loan growth with AUM for both MGFL and MUTH growing at 10%+ q-o-q. IBFSL on the other hand is expected to report stable set of earnings with margin moderation given its shift to individual home loan segment.

Outlook

Asset quality is and continues to remain the key monitorable area for banks performance in this quarter as well and hence cautious stance is prevailing on the sector until more clarity emerges. Should banks hold up on the quality of the book or provide any positive outlook for the same, it would act as a positive sentiment on the sector. Though further underperformance of banking stocks could emerge given the fickle macro economic conditions, we prefer banks with strong capital adequacy and coverage ratios such as HDFC Bank and BOB and recommend sticking with these names from long term perspective. MUTH & MGFL remain are strong Buys in NBFC space.

Source : Equity Bulls

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