Stick to strong bank stocks; HDFC, IndusInd among a clutch of better bets

Advocating selective stock-picking in the banking sector amid current uncertainty over rising non-performing loans, ICICIdirect.com has advised investors to stick to shares of strong banks including HDFC and IndusInd Bank. The brokerage house has said other banks shares that can be bought are State Bank of India, Axis Bank and City Union Bank.

On government-owned banks, a ICICIdirect.com report said “entering PSU banks at current levels would not be a prudent strategy despite them seeming to be available at cheap valuations. We observe that PSU banks do not have any major levers/drivers of earnings recovery apart from a revival in economic growth and fall in G-sec yields (not seen as windfall in FY17E).”

It said that private banks may be a better placed to take advantage of an economic recovery. “In case of some strong private banks, their retail segment is performing well, helping them sail through the current environment profitably. Hence, as and when an economic revival happens, private banks can still outperform with stronger returns,” the brokerage house has said.

The report said banking as a sector is likely to under-perform for some time. “With economic revival taking longer-than-expected and the focus of central banks on cleaning the balance sheet of banks, we expect the under-performance in the banking sector to continue in the near term. Therefore, we advocate selective stock picking rather than blanket exposure to the sector,” the report said.

The banking sector has been underperforming the Nifty for the last several quarters now, bearing the brunt of moderate credit growth (9.7% YoY) and significant asset quality pressure. Stretched corporate balance sheets have plagued banks with a huge pile of bad assets, which has increased from 4.5% in FY15 to 6.2% in Q3FY16, ICICIdirect.com has pointed out.

The report said that proactive recognition of asset quality pains, led by RBI’s asset quality review (AQR), has pushed the bottom line of a few banks into the red in last quarters. The downtrend in capital adequacy ratio (CRaR) owing to persistent asset quality woes and slower growth (12.7% in Q3FY16 vs. 13% in FY15) has been another area of concern for Indian banks.

Core capital requirement of PSU banks is estimated at a staggering Rs 2.1 lakh crore in FY16-19E. Out of this, Rs| 1.1 lakh crore may be raised from capital markets on government stake dilution while monetising non-core assets seems a hard nut to crack. Moderation in industry credit offtake had begun from FY10, from 24.4% YoY to 5.3% in FY15. “Given stagnant corporate capex, policy hurdles and reluctance of bankers to lend to businesses with stretched balance sheets, credit traction is expected to remain subdued at 10-11% in FY16-17E led by retail, agri and government business,” the report said.

Non-performing assets (NPAs) of the banking sector has been a cause of concern with Q3FY16 being one of the worst quarters for the banking system in terms of asset quality and, consequently, in terms of profitability.

Absolute Gross NPA increased to Rs 4,36,020 crore, up 50.6 per cent YoY and 28.8 per cent QoQ (GNPA ratio at 6.2%) while restructured assets (RA) were at Rs 4,20,000 crore (6 per cent of loans). PSU banks continue to be worse off on the asset quality front with GNPA of Rs 3,90,443 crore (GNPA ratio at 7.4 per cent) while GNPA of private banks was at Rs 45,577 crore (GNPA ratio at 2.6 per cent). Thus, total stressed assets of the system as on December 2015 were at 12.2 per cent of loans or Rs 8,56,000 crore. This is apart from newly formed categories of 5/25 refinancing scheme and strategic debt restructuring (SDR).