Banking stocks had a roller coaster ride over the last few months. Cases of fraud have changed the way banking sector was looked at. While the fraud related cases are restricted to a few banks as of now, the fear that more issues could come up has made investors looking at the true book value of banks in a more prudent way. The biggest question is, what is the true book value of banks adjusting for all the stressed assets?
While the sector was already struggling with the above issues the rising bond created further trouble. However, the regulators’ last move of allowing banks to amortize MTM losses on bonds over four quarters brings in some relief. The move could leave banks with relatively higher income which could be used for providing bad assets that might come up during the quarter. While this comes as a near-term relief the bond yields in India is unlikely to soften further in the coming months.
On the business front, banks are likely to report moderate credit growth during the quarters. As per RBI’s latest data, the credit growth has been Rs 8.8% for the industry. However, if we look into details again, the growth has largely come from the retail side which grew by 20.4%, which means excluding retail the growth has been merely 6.6%. What is worrisome is whether the growth rate will be maintained or not. On the back of recent issues it is very likely that banks will become more cautious toward lending to the corporate sector. Credit towards large scale industries remained almost flat, growing by a merger 0.4% YoY, while that of Medium Enterprises grew by 2.3%. The Micro industries however had a slightly better growth rate at 4% YoY. The share of industrial credit has however been continuously declining over many quarters. Its share in total bank credit now stands at 35.6% compared to 38.4% a year back and 41.7% two years back. On the other hand the share of retail credit has been on a continuous rise and now stands at 25.1% vs 22.7% a year ago and 20.9% 2 years back. With corporate sector not planning major capex the natural choice for banks is the retail creditor.
However, as we know retail credit is not everyone’s cup of tea and a handful of banks mostly in the private space have been dominating the segment. From this, it is fair to believe that this quarter again will be the case of growth coming in from large retail-oriented banks and banks which are focused on few segments in their expertise. HDFC Bank and IndusInd Bank fit into this category and hence feel they have the potential to deliver good numbers for the quarters and many quarters to come. The upswing in the auto sales, both commercial and passenger supports our belief that the quarter gone by will again be for the focused banks. Our top picks in banking space remains HDFC Bank and IndusInd Bank.
Siddharth Purohit is a banking analyst with SMC Institutional Equities