Banks
Rating: Neutral
The summary: Still ?very? mid-cycle? India?s banks remain fundamentally ?verrry? mid-cycle. Most recent trends however suggest some cyclical tweaks and swings: (i) BS—asset-quality cycle is getting a little stretched; it?s now three quarters to the bottom; (ii) P&L – Revenues looking up!, Costs making a difference and (iii) Elections – are a play, opportunity/risk ahead. Stay neutral, it?s going to be up & down, and Axis/ICBK are our top picks.
The BS: Weaker ? Asset quality?s getting a little stretched: deterioration stays high (6% annualised slippage for PSUs), restructurings rise (scale, pipeline, average size), and management commentaries remain cautious. It?s probably another three quarters to the bottom, there?s no V ahead?it?s going to be a stretched U, and loan growth would remain sub-15%. You have to be patient with U?s.
* The P&L: Better ? It?s surprisingly looking up: PPP (ex-trading) +7% q-o-q with higher margins (a tad), rising fees and a mixed cost show. While offset by BS costs (PAT -5%, credit costs +18% y-o-y), banks are showing some pricing power and discipline. It?s however split on costs: Private banks cyclically offsetting revenue slowdown through costs; PSUs counter-cyclically (or out of control) offsetting revenue ups with high costs. The P&L slightly offsets BS: but will it have leverage on the turn?
* The Spice: Elections?The banks are a big play: historically (high beta), economically (cycle is low ? expectation swing could be large), and individual stock/business leverage wise. We would expect PSUs (PNB/SBI) followed by Axis/ICBK as most sensitive to a risk on, and HDFC/HDFC Bank the best hedges against a risk off. The election build-up should swing bank stocks ? beyond their businesses.
* The stocks ? We stay neutral on the sector?believe the ?Mid-cycle? fundamentals will keep valuations largely around means: environment/market swings would offer opportunities for those looking for trading ideas. Prefer privates to public, banks to NBFCs, and Axis/ICICIC Bank are our top picks.
?Citi
