Private banks to gain most from Budget 2015

Lower tax payouts from FY17 to boost earnings

Much was expected from the Budget on the banking sector but given the limited fiscal space, it could not do much for the cash-strapped public sector banks (PSBs).

While state-owned banks struggle for capital, the private sector will continue to reap benefits through higher market   share gains and lower tax rate in years to come.

Additionally, the merger of limits for foreign institutional investors and foreign direct investment, foreign limits for foreigners will increase to 74 per cent. Axis Bank and YES are expected to be big beneficiaries.

The finance minister has allocated merely Rs 7,940 crore to the cash-starved PSBs, while the capital needs of public sector lenders is in excess of $50 billion. This is a clear negative for PSBs, as several of them are in desperate need of capital. With no capital from the government, private banks are expected to garner further marketshare as demand for credit picks up. Analysts are expected to turn overweight on stronger private sector banks such as Axis Bank, ICICI Bank, HDFC Bank and Kotak Mahindra Bank.

Credit Suisse explains that continuing capital constraints on PSBs will further accelerate the market share shift to private banks and, thus, this Budget provides more reason to ‘overweight’ them relative to the PSBs. HDFC Securities believes the move is negative for Allahabad Bank, Bank of India and Central Bank.

The markets have welcomed the move to set up a Bank Board Bureau, which will be responsible for the selection of top management of public-sector banks and to find innovative ways to raise capital. However, since several legislative changes are required to implement this, the move will have little impact in the near term. The timeline of this remains uncertain, claim analysts. Even the Bankruptcy Code will help recovery of bad loans in times to come. However, that, too, is a long-term positive.

The Street is looking at earnings upgrade for the sector from FY17, when the sector's tax rates start to come off from the level. While some housing finance companies and banks enjoy certain exemptions, the net impact of corporate taxes coming down will have a beneficial impact on banks from FY17. According to JM Financial, lenders such as HDFC Bank, Axis Bank, IndusInd and YES Bank, which do not avail the deduction, will benefit the most from corporate tax rate reduction.