According to Edelweiss Securities, private banks are likely to fare well due to better risk management practices, strong liabilities traction and robust capital positions compared with PSU banks
Over the past few months, foreign fund flows have been strong and equity markets have been riding on the expectation of green shoots for pick up in industrial activity bolstered by a pro-business government. However, Edelweiss Securities Ltd feels that asset quality improvement for banking and financial services sector is still one to two quarters away.
"Private banks are likely to fare well due to better risk management practices, strong liabilities traction (set to capture growth) and robust capital positions. We continue to prefer large-cap private banks—Axis Bank, ICICI Bank. Also, we await clarity on capital raising by public sector (units) (PSU) banks, which is likely to be addressed in budget," said the report.
Edelweiss said, the first quarter of FY15 is expected to be a seasonally weak quarter for credit growth (industry up 14% year-on-year (YoY) and flat quarter-on-quarter (QoQ)), while contribution of cyclical factors to growth is some time away. Stable money market cost of funds is likely to be flat, but Q4 FY13 priority sector lending (PSL) build up can depress yields. While net interest income (NII) will track the credit growth number, other income is likely to be weak, though treasury income from equity book could buoy it a little. Credit cost is not likely to dip meaningfully, which together with introduction of provisions for un-hedged forex exposure of borrowers, will pressurise profit after tax (PAT), it added.
According to the report, banks have been selling restructured accounts to asset reconstruction companies (ARCs) before they turn into non-performing assets (NPAs), though it’s still early to label it a trend. Power finance non-banking finance companies (NBFCs) are likely to report stable asset quality, but auto NBFCs’ recovery could be delayed, Edelweiss said.