Why Nirmal Bang prefers private over public banks

Nirmal Bang has come out with its report on "Banking Q3FY13 quarterly results review". The research firm continues to prefer private banks as compared to Public Sector Banks in terms of core income growth and asset quality. The initiatives taken by the government of India in order to revive the economy will have a long term positive impact on the overall sector, says the research firm.

Q3FY13 Quarterly Results Review

The overall banking result for Q3FY13 was broadly on expected lines. The highlights of the overall banking results are:

• Flattish growth in Net interest income
• Decline in bond yields supported growth in non interest income. However core fee income continued to disappoint with lower growth in loan book
• Loan book witnessed moderate growth reflecting cautious approach adopted by most of the banks
• Provisions continued to remain higher impacting bottom line performance
• Additions to NPA continued to remain elevated though the pace has gradually subsided as compared to Q1 and Q2FY13.
• Private Banks continued to impress with an all round show whereas PSU banks once again had to bear the brunt of stressed assets.
• HDFC Bank , Yes Bank , Indusind Bank , ING Vysya and J&K Bank continued to demonstrate healthy performance across all parameters amongst the private sector banks.
• Within PSU Banks space; Banks like PNB and Union Bank of India surprised positively with improvement in performance on the asset quality front.

In the last quarter we had witnessed a significant rally in the banking stocks driven by improved sentiments on the overall economic situation and initiatives taken from the government of India to revive the economy. Amidst the rally, the PSU banks were the forerunners and we saw an up move of nearly 25%-30% in the stocks prior to the results. However, the rally was not sustainable as there was no major improvement in the results. This quarter was no exception to the fact that the private banks once again outpaced the PSU banks in terms of performance on all fronts, be it asset quality, business growth, core performance or profitability.

Going forward, after taking cues from various interactions with Management post results; declining interest rate cycle and improving macro economic conditions, we believe that the asset quality woes for the banking sector on a whole seems to be peaking out. Although we do not expect an immediate recovery in the performance of the banks, we believe that from Q1FY14E onwards the signs of improvement will be visible albeit on a gradual basis. We have to accept the fact that slippages will continue to remain a part and parcel of the PSU banks but better recovery efforts are likely to help them in bringing down the NPAs from the current levels.

We continue to prefer Private Banks as compared to Public Sector Banks in terms of core income growth and asset quality. Based on our analysis of the Q3FY13 results we have shortlisted some stocks which have demonstrated better performance than the other banks and based on that can outperform the overall performance of the banking sector.

Going forward: What needs to be watched out for
While the asset quality for banks still remains a concern, the efforts undertaken by the banks in recovery and up-gradation will play a critical role in containment of deterioration in asset quality. Q4 is seasonally strong quarter for the bank and we may see some extravagant increase in banks operating performance driven by cyclicity impact. Apart from that we do not foresee a significant improvement in Q4FY13 earnings growth as the business environment continues to remain challenging coupled with the asset quality challenges.

The initiatives taken by the government of India in order to revive the economy will have a long term positive impact on the overall sector. We believe that positives of rate cut and revival of economy would play a crucial role in performance of the banking sector as a whole. Based on our various parameters and current valuations we believe that the following stocks can outperform the overall banking sector. We have retained most of the stocks of our last review performance as they have been delivering consistent performance over the period. In this review we have added Union Bank of India (improving performance in the last 2 quarters); HDFC Bank (consistent performer) and PNB (positive surprise) in our list.

Non-Institutions holding more than 90% in Indian cos

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