Sector Watch: Banking

Sector Watch: Banking

In view of the rising asset quality concerns, we have analysed the composition of the outstanding credit to estimate the extent of risk prone assets.

Our calculations suggest a risk prone exposure of around 13-16% of the total outstanding credit, which can push the industry level %GNPA to ~6% in bear case and ~4% in base case scenario.

However, marked-to-market (MTM) write-backs (as G-Sec and corporate bond yields have eased), softened stance of RBI towards loan restructuring and healthy capital adequacy level to help mitigate pressure on profitability.

While we have already factored higher slippages in our estimates, we shall revisit our estimates for banks under our coverage following Q3FY2009 results.

While we have been cautious on banking stocks due to asset quality concerns, a further slide in bond yields, easing in corporate spreads and rapid rate cuts warrant easing in the extent of asset quality concerns, thereby turning their current valuation attractive.

We prefer large public sector banks (PSBs; Bank of India, Punjab National Bank and Union Bank) and HDFC Bank in private sector space from a long-term perspective.