Kotak Securities says it finds little merit in arguments for a sharp deterioration in the operating environment of the banking sector and believes margins will moderate only marginally from 2Q’s elevated levels
Bank stocks have been falling sharply mainly on two concerns-one is the tight liquidity conditions which could result in pressure on margins; and the second is fears of higher non-performing loans (NPL) due to the exposure to telecom and real estate after the recent scams in both sectors.
The BSE Bankex is down 3% over the past month against the Sensex's 4% gain-underperforming heavily. It is still 13% below its peak in early November.
Kotak debunks both these concerns as overstated. According to the brokerage, "margins for the banking sector have always remained strong in a tighter liquidity environment. Telecom exposure of the banking sector is 2% of loans and real estate is another 3%, with reasonable collateral". Other than this, it believes that loan growth is always a function of the overall GDP growth and "at 8.5-9% real GDP growth, 18-20% growth is unlikely to pose a challenge".
Its main comfort about delinquencies came from discussions with bankers, through which Kotak found that within telecom, larger and more financially robust telecom companies have a very high share of loans and so the chances of these loans going bad are negligible. In real estate, collateral levels are comfortable and over the past couple of years incremental funds have largely gone for residential projects and not for commercial projects. In fact, for some banks such as Bank of India (BoI), Canara Bank, Indian Bank, State Bank of India (SBI), Axis Bank, Federal Bank, HDFC Bank, and ICICI Bank, it expects overall lower gross NPLs in FY12.
It recommends banks with high CASA (the current account to savings account ratio) such as SBI, Punjab National Bank (PNB), Bank of Baroda (BoB), ICICI Bank and Axis Bank. While the report concedes that there might be some lag in the hike in lending rates catching up with deposit rates, it feels that "pricing power remains with banks, resulting in higher lending rates as well". However, in the meantime, a high CASA bank has a natural advantage as its deposit costs do not rise as much as some of the wholesale focused banks.
Kotak points out that while net interest margins (NIMs) of banks have improved hugely over a year-Andhra Bank's has gone up from 3.1% to 3.9%, SBI's from 2.6% to 3.4%, Federal Bank's from 3.7% to 4.4%--it does assume a decline in FY12, but only slightly. In fact, ICICI's NIMs will probably improve in FY12.
Deposit and CASA growth has been healthy for most banks-Andhra Bank 26% and 30% in 2Q FY11, BoB at 30% and 36%, BoI 21% and 28%, Canara Bank at 22% and 29%, Corporation Bank at 20% and 25%, Indian Bank at 20% and 32%, Union Bank of India at 30% and 33%, Axis Bank at 36% and 41%, HDFC Bank at 30% and 51% (the highest), ICICI Bank at 13% (from negative growth) and 44%, and Yes Bank at 107% and 10%. Some of the laggards, especially in terms of deposit growth, have been Federal Bank at 8% and 29%, Indian Overseas Bank at 8% and 33%, Oriental Bank of Commerce at 16% and 25%, PNB at 18% and 41%, and SBI at 11% and 48% (the last two due to a higher base).
Kotak believes that there is likely to be margin pressure on non-banking finance companies (NBFCs). In FY10, surplus liquidity led to falling bulk borrowing rates and most NBFCs made hay with high margins. However, with the recent sharp hike in these rates, margins may come under pressure.
"Housing finance companies have now (December 2010) raised home loan rates for new customers by 50-75 bps, this will likely support near-term margins though such a rise will impact volumes over the longer-term." Note that SBI will review its teaser rate home loan scheme in January 2011.
Auto finance companies will pass on rate hikes, feels Kotak, while for infrastructure finance companies, margins are at a peak.