Core earnings during Q1FY10 are likely to be moderate on the back of moderate loan growth (15.1% y-o-y, as on 26 June, 2009) and likely pressure on their NIMs.
The banking sector under our coverage universe is expected to register NII growth of 16.3% (y-o-y) and pre-provisioning profit growth of 31.3% (y-o-y) in Q1FY10.
However, net income growth is expected to rise at higher levels of 27.6% (y-o-y) in Q1FY10 due to low base effect last year when many banks provided for MTM losses on their G-Sec book and transfer of securities from AFS to HTM.
We expect Axis Bank (44.9%), HDFC Bank (30.2%), PNB (35.7%), Andhra Bank (60.6%) and Union Bank (46.9%) to show healthy growth in bottom lines, whereas ICICI bank is likely to deliver flat growth (1.6%).
Credit off-take (as on 26 June, 2009) has been moderate at 15.1% (y-o-y) whereas deposits grew 21.5% (y-o-y), during the same period.
In Q1FY10, loans have increased Rs83 billion as against the deposit growth of Rs1,531 billion leading to decline in C/D ratio from 72.3% at the end of 27 March, 2009 to 69.7% at the end of 26 June, 2009.
We expect this moderation in loan growth to continue in H1FY10 and meaningful up-tick is expected in H2FY10 onwards. We have assumed 18-19% growth in loan book for banks under our coverage.
During the same period (as on June 26, 2009), deposits grew 21.5% (y-o-y). Demand deposits have declined by 3.2% (YTD) during Q1FY10, whereas time deposits increased 5.1% (YTD) during the same period.
The strong growth in time deposits has mainly contributed to the growth in aggregate deposits of the system.
We maintain our long-term positive stand on the banking sector, as we believe that we are on the downward trajectory of interest rate cycle.
We like those banks which focus more on quality rather than quantity of assets and have a strong resource base.
Top Picks: Axis Bank, BoB, Union Bank, PNB, Indian Bank