Q2 Banking preview: Mid-sized private banks to outshine peers

Among state-owned banks, SBI and Bank of Baroda are the key picks

The key factors expected to impact earnings for banks in the July-September quarter are -- first, tepid corporate loan growth; second, excess liquidity chasing quality credit (pressure on yields); and third, progress on stressed asset resolutions under Insolvency and Bankruptcy Code (IBC) as well as quantum of new cases referred.

Backed by excess liquidity and continued high current account, savings account (CASA) ratio in the system, cost of funds may remain benign, especially for bulk lenders. We expect trading gains to remain flat/decline marginally versus the first quarter of the FY18.

Key things to watch for in the results would be: (a) banks’ comments on the second list of exposures referred to the IBC, outstanding provisioning and the expected impact in the ensuing quarters, (b) stake sale in strategic assets and capital raising plans, (c) power sector exposure, (d) comments/accounting on the large assets resolution (ESSAR, JP Associates) during the quarter, and (e) the trend in retail loan growth post demonetisation.

In our view, excluding power, most of the highly levered sector stress exposures are well communicated/recognised by banks. However, there could be surprises in the case of existing restructured / SDR (strategic debt restructuring) cases being referred to NCLT. In the power sector, long-term restructuring in the recent past would make it difficult to assess the asset quality impact for FY18.

On a sequential basis, we expect profit growth to pick up for state-owned banks (SOBs) as a whole due to moderation in provisions from the highs of Q1FY18. Year-on-year (y-o-y) growth is expected to be strong on a benign base, more so for private banks like Axis Bank.

We expect balance sheet clean-up for ICICI Bank and Axis to continue, which would remain as an overhang on their profitability. Mid-sized private banks would continue to outshine peers due to continued market share gains (loan growth of 4-5x system), stable asset quality, and stable-to-improving margins (sharp fall in bulk deposits). We expect IndusInd Bank, YES Bank, RBL Bank and Kotak Mahindra Bank to report profit after tax (PAT) growth of 25% on y-o-y basis.

For comparison, State Bank of India’s (SBI’s) base quarter earnings are adjusted for associate bank performance. Hence, there is a strong variation in SBI’s earnings on both q-o-q and y-o-y basis. We remain upbeat on the value migration story from state-owned banks to private sector banks. Among private sector banks, the emerging private banks are likely to be the major beneficiaries. Among state-owned banks, we like SBI and Bank of Baroda. While among private sector banks, our key picks are HDFC Bank, ICICI Bank and YES Bank.

The author is head of research at Motilal Oswal Securities. The views expressed are his own.

Disclaimer: Views expressed are personal. They do not reflect the view/s of Business Standard.