Monday, November 21, 2011

>Banking Sector: Worsening NPL gap to prolong underperformance of PSBs

The large rise in net NPL/networth of PSBs in the Sep11 quarter
overshadows the expansion in their NIM. The NPL gap against PSBs is
now at a 12 quarter high and getting worse. At mid‐Nov, the valuation
gap between Nifty and CNXPSBK is at its highest in eight quarters. The
spurts of outperformance may stay short‐lived; we estimate the
underperformance could extend by up to six more months. The
surprise freeing of savings bank deposit rates in the Oct11 monetary
policy may pull down ROA for all, over the long term. Its medium term
impact may be less stark than implied by early reactions. Pricing is not
the sole influence on growth of savings deposits. The trend in NPLs
may be a stronger influence on valuation than the revisions in policy
rates. BOB and ALBK among PSBs, and HDFCB and IIB, among new
banks, are the preferred stocks over the near term.

Buoyant NPLs pull down Sep11 earnings and worsen the outlook
The gap in the net NPL/networth between PSBs and new banks is currently at
its widest in four years and is rising. PSBs saw a 3.3% sequential rise in the net
NPL/networth to 16.7%, while it remained stable for new banks at 2.9%. The
outstanding gross NPL of PSBs increased by 19% sequentially, against a 2%
increase for new banks. NIM expansion and pre‐provision profit growth of 16%
was offset by c44% rise in NPL provisions. During the past six weeks, consensus
net profit growth of PSBs for FY12 has been lowered by 7% to 15% y‐o‐y.

Underperformance of PSBs may extend for another six months
Oct11 was the worst month for PSBs after May11. The premium of the Nifty
P/E over the CNXPSBK increased by c16% in the past six weeks to c125% at the
end of 17 Nov11. It has stayed above the 12‐month moving average for close to
seven months. Historical precedence suggests the underperformance may
extend for another six months. The Bankex underperformed the Sensex by
2.4% in Oct11 and by 3.5% in Nov11. With a combined weight of c70%, new
banks contributed 91% of the rise in the Bankex in Oct11. The trend reversed in
Nov11, as new banks contributed c79% of the c11% fall in the Bankex.

Early reactions to SB deregulation reversed in the following weeks
In our report dated 25 Oct11, we had stated “we believe banks may follow
different strategies, with banks with a very small franchise in savings deposits
possibly adopting aggressive pricing.” Pricing is not the sole influencer of
savings deposits growth. Deregulation may lead to a fall of up to 25‐bp in the
ROA of all banks. The initial run up in banks with low CASA did not sustain.

Contribution of overseas sources of fund to the commercial sector rises
Loan growth declined by 5.4% in Oct11 to c18.0% y‐o‐y. Overseas sources of
funds offset the fall in the contribution of bank loans. The 11% decline in the
contribution of non‐food loans in the Sep11 quarter to c41% was offset by a
13% rise in the contribution from overseas sources such as ECBs/FCCBs and FDI.

Preferred stocks over the near‐term
BOB, ALBK, HDFCB and IIB are the preferred stocks over the near term.

To read the full report: BANKING SECTOR