Friday, June 25, 2010


The BFSI space, which has ~25% weightage in the Nifty, lifted the index
in the recent rally from the lows of 4700. Within the banking space, we
saw midcap banks taking the cream of the rally on takeover and
recapitalisation buzz. The credit growth in the system has started to
pick up pace. It grew by 19.1% while deposit growth moderated to
14.3% for the fortnight ended June 4th. Banking sector stocks have
outperformed the market over the past 12-15 months. PSU banks are
now trading between 1.2x and 1.8x FY12E ABV while private banks are
trading at 1.8-3.5x. Both private and public banks have led the rally in
our markets from the lows of March 2009.

􀂃 What next?
In our view, banking stocks are likely to move in line with markets in
the coming quarter as the first quarter is a lull season for bank
credit. We prefer banks that have sustainable NIM (high CASA, low
bulk deposits), higher RoE and growth potential in addition to low
volatility to profitability (i.e. less dependency on treasury gains).
For FY10, credit growth in the system is expected at 20% and
deposit at 18% with an upward bias. We expect the NIM for banks to
stabilise. Base rate implementation is unlikely to impact the
bottomline substantially. Asset quality will remain a concern for a
couple of quarters more on account of slippages from restructured
assets. Most of the banks have already seen a slippage of 6-10%
from the restructured portfolio so far and this is likely to inch up
further in the coming quarter.

On the basis of the following parameters we prefer Oriental Bank of
Commerce, Union Bank of India, Punjab National Bank from the
public sector space and HDFC Bank from the private space. We also
recommend IDBI Bank as our contrarian pick from the coverage

Bearing in mind the current liquidity scenario where banks are borrowing
under the LAF window from RBI and with inflation at 10.2% in May 2010,
we expect rates to have an upward bias from here on. The RBI may raise
both repo rate and reverse repo rates by 25 bps each to 5.5% and 4.0%,
respectively, in the July monetary policy meet though monsoon will be a
key monitorable.

To read the full report: BANKING INDUSTRY