Banks asset quality concerns to persist in Q3FY13 results

Nirmal Bang has come with its December`12 quarterly earning estimates for banking sector. In 3QFY13, there exists a possibility of treasury profits and write-back of depreciation on investments, which we have not factored in on account of movement of yields and open market operations (OMO) conducted by the Reserve Bank of India (RBI).

1HFY13 remained challenging for the macro-economic environment and the financial sector amid weak domestic growth outlook and difficult business scenario. We remain wary of growth prospects, despite interest rate easing on cards, due to asset quality concerns. In 3QFY13, there exists a possibility of treasury profits and write-back of depreciation on investments, which we have not factored in on account of movement of yields and open market operations (OMO) conducted by the Reserve Bank of India (RBI). We expect the banks in our coverage universe to clock earnings growth of 12.4% YoY and 11.4% QoQ aided by net interest income (NII) growth of 11.6% YoY and 7.2% QoQ amid 14.6% YoY and 10.1% QoQ rise in loan provisioning.

Challenging macro-economic environment: Against the backdrop of a slowing domestic economy, decelerating credit growth and rising loan delinquency, we expect the banking sector's operational performance to remain weak in 3QFY13. The asset quality of banks plagued by tepid economic activity would continue to deteriorate amid weakening credit profile of the industry. Even as the global economic outlook remains obscure, India's economy grapples with slowing demand and subdued investment sentiment. The country's gross domestic product (GDP) in 2QFY13 grew 5.3% compared to 5.1% in 1QFY13, while industrial activity rose sharply in October 2012 owing to a low base and festive demand. As the macroeconomic environment remains weak, we expect the strain on banks' balance sheets to continue. For 3QFY13E, we expect net profit growth of 12.4% YoY and 11.4% QoQ for the banks (state-owned and private banks combined) in our coverage universe aided by NII growth of 11.6% YoY and 7.2% QoQ amid loan provisioning growth of 14.6% YoY and 10.1% QoQ. For 3QFY13E, we expect the private banks in our coverage universe to report NII/net profit growth of 24.6%/17.8%, respectively, YoY, compared to YoY growth of 6.9%/9.2%, respectively, of state-owned owned banks.

Asset quality concerns persist: Banks' asset quality remained the key challenge amid slowing demand and high interest rates impacting profitability. Amid persistent stress, gross non-performing assets (NPAs) in the banking system increased from 2.36% in March 2011 to 3.25% in June 2012, while the percentage of restructured standard accounts to gross advances doubled from 2.7% in 2009 to 5.4% in June 2012. Amid expectations of slow domestic recovery and near-term prospects of the Eurozone's revival weak, we remain cautious on growth prospects and asset quality of banks going ahead. For 3QFY13E, we expect gross NPA growth of 39.2% YoY and 6.2% QoQ and net NPA growth of 46.0% YoY and 7.2% QoQ for the banks in our coverage universe.

Loan restructuring overhang: Fragile global outlook and challenging domestic economic environment had its repercussions in the form of growing stress across sectors, making small and medium enterprises extremely vulnerable. We expect restructured standard loans to increase 66.2% YoY and 7.7% QoQ in 3QFY13E amid sustained pain from stressed sectors.

Company	Net interest income			PAT			Ratings
	3QFY13E	YoY (%)	QoQ (%)	3QFY13E	YoY (%)	QoQ (%)
HDFC Bank	37,768	21.2	1.2	17,023	19.1	9.1	Hold
ICICI Bank	36,471	34.5	8.2	20,396	18	4.3	Sell
Axis Bank	24,703	15.4	6.2	11,933	8.3	6.2	Sell
IndusInd Bank	5,695	32.2	11.7	3,249	57.8	29.8	Buy
SBI	114,342	-0.3	4.2	35,836	9.9	-2	Sell
BoB	33,258	25.2	29.6	13,242	2.7	13.6	Sell
PNB	39,272	11	7.6	12,609	9.6	18.3	Sell
Canara Bank	20,583	7.3	5.2	8,883	1.5	34.4	Sell
Bank of India	23,325	12.8	6.2	8,565	19.6	183.7	Sell
Syndicate Bank	14,694	10.9	5.7	4,194	24	-9.5	Hold