The banks under our coverage have churned out robust earning growth during Q4FY2009. The higher-than-expected earning growth was driven by stellar treasury gains and healthy credit growth in case of public sector banks (PSBs).
The private sector banks also surprised positively, though the bottom line at aggregate level witnessed a marginal contraction.
Q4FY2009 further widened the divergence between public and private players on business growth front. PSBs continued to lend aggressively, while private players moderated their balance sheet growth against the backdrop of macro uncertainties.
However, the margins contracted sequentially for most banks primarily owing to weaker deployment rate and prime lending rate (PLR) cuts (especially by PSBs).
Treasury gains drove the outperformance at bottom line level for most of the banks. The stellar treasury gains came as a surprise considering the fact that the bond yields were on an up-move for most part of the quarter after softening in the initial part.
The fee income growth also remained healthy, as PSBs benefited from healthy loan growth, while Axis Bank benefited from improved activity in debt syndication etc.
The outlook for the banking space has improved significantly in recent months on the back of emergence of green shoots (nascent signs of recovery) and a decisive political mandate.
Though near-term challenges (weak credit demand and margins) persist, the decisive mandate is likely to have a far reaching impact on the overall economy and banking space in specific.
In light of earlier-than-expected signs of bottoming in the real economy coupled with palpable positives from the decisive political mandate, we had a re-look at our model assumptions.
While we are comfortable with our earnings estimates, we are lowering our risk premium assumptions to account for the improved visibility at macro level. Importantly, we are leaving our asset quality related assumptions unchanged, as we await stronger and more widespread economic recovery signals.
Hence, a stronger and earlier-than-expected economic recovery is a key upside risk to our call on the banks under our coverage, while a potential “W” shaped recovery is a key downside risk.
Though we are maintaining our recommendation for the stocks under our coverage, we advise our investors to book partial profits in the State Bank of India (SBI) and ICICI Bank, as the valuations have turned rich post the recent run-up in the stocks.
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