Banking Sector: June Quarter 2012 Preview

For the last couple of quarters investors have been relying on the banking space. We at DSIJ had informed our readers in the investing fraternity during the third quarter result update that the worst is almost over for the banking space. This has to some extent come true which is evident from the fact that the BSE Bankex has outperformed the broader indices. On an YTD basis the BSE Bankex has appreciated approximately by 33 per cent while the Sensex has moved up by 13.5 per cent. So will this trend continue going ahead? Will the investors be disappointed with the June quarter numbers of India Inc., particularly from the banking sector, or will the banks perform better as compared to most of the other sectors?

The truth is that this quarter may not witness an exemplary performance. The growth would probably be tepid and in single digits. We believe though that the banks would be able to post decent growth in the coming quarters. The much-awaited interest rate reversal has kicked off from April 2012 with the RBI slashing the repo rates by 50 basis points to 8 per cent. One should note that even after the RBI cut its key rates, most of the banks did not pass on this benefit to their customers or at best did so in a minimal way. The rate reduction started from June when there was speculation that the RBI would once again slash the rate in order to spur growth which had plunged to a nine-year low of 5.3 per cent in the March quarter. The markets were disappointed though since the RBI maintained its status quo. There is a possibility, however, that the banks may see some improvement in their net interest margins (NIM) in the June quarter.

The banking sector may continue facing pressure on the asset quality front. Even though most of the assets were restructured in the December 2011 and March 2012 quarters, there are counters and companies that are still facing serious headwinds caused by the rising interest cost and slowdown in growth. One has to watch out for ICICI Bank’s NPA movement as it has sold its entire exposure of Kingfisher Airline’s Rs 430 crore to SREI Infrastructure. The latest media report suggested that quick recovery from the debt trapped Kingfisher Airlines is unlikely which would further add on pressure to SBI and also to various other banks having exposure to the Airline.   

Further, one has to watch out for the management guidance of banks’ capital adequacy ratio (CAR) with regards to the BASEL III norms. Most of the banks are comfortably placed to fulfill the requirement by FY13 and there will be no immediate impact on the Indian banks, barring a few public sector banks like Central Bank, Vijaya Bank and UCO Bank.

Business growth in terms of deposits and credit would remain a challenging factor for the banks and it is quite likely that the private sector banks would once again outperform those in the public domain. The net profit of the private banks is expected to grow by around 25 per cent while that of the public sector banks, excluding the SBI, is expected to grow by around 15 per cent on a YoY basis.

One should watch out for Central Bank of India’s results and guidance to see if the management has or will be able to achieve a turnaround or would again post a dismal performance. In the March quarter of 2012, Central Bank of India posted a loss of Rs 105 crore against profit Rs 132 crore in the same quarter last year.  

Until the time the growth curve shapes out properly for the economy to move forward, banks would continue to face some pressure on their asset quality front. However, they would be able to sail through most of the headwinds that have been affecting the macro economic scenario. As such, one has to be really stock-specific while making any investment. We believe that this time also the banks would perform better than most of the other sectors.

The following is the result calender for few banks, and hence one could watch out for the same. Nevertheless we would keep updating the Results through our Mindshare column.