We expect PSU banks to continue cornering a lion’s share of incremental business over the next 12 months.
Our expectation is based on GoI’s commitment to recapitalize PSU banks for unlocking the lending freeze and reviving the credit markets.
We believe that over the next one year, the larger PSU banks would outperform their private sector counterparts in terms of balance sheet expansion and credit quality control.
Our demand-side analysis of credit off-take suggests expansion of credit in the 16-18% range, driven by infrastructure (primarily power and telecom), housing (and ancillary industries), pharmaceuticals, autos, and textiles.
On the supply side, our credit growth estimates for the top eight banks under our coverage universe (51% of overall bank credit) indicate a credit expansion of ~19% during FY10E.
At an aggregate level, we expect a sharp increase in the systemic gross NPAs for banks, from ~Rs800bn (as of Mar’09) to Rs980bn (by Mar’10).
We, however, believe that the valuations (just prior to the recent surge) factored in risks that were overplayed in the domestic context without taking due cognizance of levers (like coverage ratios) employed by banks to tide over tough times.
Our estimates build in a scenario of restructuring the loan book to the extent of 4% during FY10E.
We expect banks within our expanded coverage universe (except ICICI Bank) to report close to 20-30bps y-o-y drop in NIMs during H1FY10E.
However, by H2FY10E, the liability-side re-pricing at a portfolio level would begin reflecting in a lower cost of funds, partially cushioning the decline in margins.
Our investment thesis is anchored on expectations of a revival in credit demand from H2FY10E. A more prolonged period of subdued systemic credit growth would be negative for all banks within our coverage universe.
Our assumptions on incremental delinquencies factor in ~12-18% of slippages coming through from the restructured portfolio (restructuring for FY10E assumed at 4% of loan book). Any slippages beyond these levels would be negative from a valuation perspective.
We initiate coverage on Bank of Baroda, Bank of India, and Union Bank of India with a BUY rating and on HDFC Bank with a NEUTRAL rating.
We recommend Union Bank of India and Punjab National Bank as the top picks within our PSU universe.