Best Indian Bank Stocks To Buy

– What’s new

For 1Q FY13, there was a marked divergence between the results of the private and public sector banks (PSBs). While the performance of the private banks was strong, with them keeping NPLs and provisioning under control, the PSBs once again disappointed on the asset-quality front, leading to continued high levels of provisions. Fresh NPLs for many PSBs, such as Punjab National Bank, Bank of India, Union Bank of India remained high (with State Bank of India yet to report).

– What’s the impact

Most banks, especially PSBs, also saw marginal falls in NIMs as their costs of funds rose due to the lagging effect of upward re-pricing of deposits. Among the exceptions were Oriental Bank of Commerce and Bank of India, which saw falls in their costs of deposit. Loan growth was strong for most of the private banks, with Axis Bank seeing the highest rise, of 30% YoY, followed by ICICI Bank, Bank of Baroda, HDFC Bank, PNB and ING Vysya – for which loan growth ranged from 21-23% YoY. The CASA proportion of deposits, in general, fell QoQ, due to a lower proportion of current accounts and seasonal factors, as the CASA percentage of total deposits traditionally drops slightly in 1Q compared with 4Q. New restructured loans also remained high for the PSBs, while there were no signs of any major increase for private banks. Among the private banks, while Axis Bank saw a rise in restructured loans, for HDFC Bank, ICICI Bank, ING Vysya and some others restructured loans were under control with a very small pipeline going forward. However, the PSBs continued to see high amounts of restructured loans, due largely to continued restructuring of the State Electricity Boards (SEBs), and also on account of more restructuring of loans to sectors such as textiles and steel.

What we recommend

In 2Q FY13, most private banks guide for a thin re-structuring pipeline. Managements also guide for fresh NPLs to be under control for them. We also expect the NIMs of private sector banks to remain stable. ICICI Bank has actually raised its guidance for NIM expansion in FY13 to around 30bps compared with its earlier guidance of a 10-15bps improvement. The managements of the PSBs are still reluctant to guide for any improvement in asset quality for 2Q FY13. However, the recovery of bad loans by PSBs has remained strong in general, which shows that a significant proportion of fresh NPLs may be technical in nature and will be upgraded in the following quarters. Also, most PSBs are now guiding for a fall in restructured loans, as most of the stressed loans given to SEBs are already restructured now. We expect the private banks to continue to outperform the PSBs in general in 2Q FY13. Among the private banks, ICICI Bank and Axis Bank are our top picks. Among the PSBs, PNB is our preferred pick.