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What Next for Banking?

Monday, April 30, 2012
By Manik K. Malakar

However, credit and deposit numbers may cause hiccups

The Indian banking industry had passed through a rough patch recently, understandable as the sector is so closely linked to the Indian economy per se. However it appears that at least in the near future the sector should fare well.

All in all only certain banking segments like those relating to governmental approvals and those necessitating policy approvals may be under pressure.
There are factors that augur well for the banking sector in the Q1 FY13 period (First Quarter Financial Year 2013) and this quarter will be better than the previous two quarters,” says K Jayaraman, Research Associate, Bonanza Portfolio. Factors that Jayaraman feels are positives for the industry would be that growth is now a priority for the government and the RBI. Inflation too is, seemingly, under control.    

However, credit disbursement , a key driver of the industry and credit growth have not been as per expectations. Credit growth was only 17% as opposed to the 21% target. “The bottom-line of the industry was not affected much and is a reflection of the resilience of the sector,” says Dr. V K. Vijayakumar, Investment Strategist, Geojit BNP Paribas Financial Services.

That credit is taken seriously by the RBI may be best illustrated by the recent repo rate cut of 50 bps and the previous CRR  cut. “Going forward RBI will continue to expand credit and even further cut the repo rates to facilitate higher growth through a soft interest rate regime,” says Jayaraman.

“Auto, real estate, infrastructure and capital goods are sectors that are likely to generate increased demand for credit and enable banks to improve asset quality,” says Jayaraman.

So if credit is being taken care off then deposits are also something that the banking industry will have to ponder about. According to inputs from Standard Chartered, deposit growth, which decelerated from February 2012, fell to as low as 13.4% as of March 23 of this year. A little later deposits picked up to 17% yoy as of March 30 2012. “We believe this is largely due to a pickup in one-off short-term corporate deposits,” note Mahrukh Adajania and Rounak Agarwal of Standard Charted.

“If deposit growth remains below 16%, it may put pressure on bank spreads in a falling rate environment because banks will not be able to bring down deposit rates sharply while weak corporate demand plus likely government pressure will drive lending rates to come down faster,” is the ominous prognosis from the Standard Charted duo.

“Reduction in deposit growth and rising NPAs (Non Performing Assets) are areas of concern,” notes Vijayakumar. But again NPAs are confined to a few sectors and are not across the board. “Deposit growth can be expected to pick up when economic growth gathers momentum,” he continues.

Credit and deposits notwithstanding, what are the other pressure points that the banking sector will have to face going forward?

“Banks are visualizing quality lending and improvement in asset quality in this quarter as against Q4 FY12,” says Jayaraman. So rate sensitive industries and SME’s (Small and Medium Industries) will perform better because of lower interest burden and NPA’s are likely to reduce, while recoveries on existing loan portfolio’s will improve.

 The “CMIE (Centre for the Monitoring of the Indian Industry) data reveals a slowdown in investment in those segments related to government approvals, policy restrictions and sectors in trouble like aviation,” says Vijayakumar.

Crude oil prices and the depreciating rupee against the dollar is still a major concern for the RBI. This could impact inflation substantially. “Recent policies of imposing a retrospective tax provision is not well received by FII’s and that could stagger investment through them,” says Jayaraman.

“Certainly FY13 will be distinctly a better year for banks as compared to FY12 in asset quality, higher yield on loans and expanded credit to various sectors,” ends Jayaraman of Bonanza.

Investor’s perspective
The equity prices of banks have gone up substantially in the month of January and February along with the general market. “The eventual correction is now taking place and banking stocks are available at better valuations today. Over all as a sector, investor’s have to remain invested in banking stocks in FY13,” says K Jayaraman-Research Associate-Bonanza Portfolio.

However, a stock specific perspective is needed. Private Banks have shown robust growth as against PSU banks. “YES Bank and Axis Bank still offer potential from current levels up to 25% for the year. Also SBI is a strong buy at current levels even with all their associated issues. The valuation, sheer size and growth will enable the bank to perform better and the stock has potential to rise by a minimum of 25 to 30% from current levels in the next two to three quarters,” says Jayaraman.

“This is not the time to sell banking stocks. Most banking stocks are fairly priced; some with high growth potential are attractively priced. Investors can buy ICICI and Axis on corrections. HDFC Bank and Kotak Mahindra Bank, though expensive, are excellent stocks that can be bought on corrections. In the mid- cap space South Indian Bank looks attractive,” says Dr. V K Vijayakumar, of Geojit BNP Paribas Financial Services.

This quarter will be better than the previous two quarters…Positives for  banking would be that; growth is now a priority for the government and the RBI. Inflation too is, seemingly, under control.

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