Anand Rathi sees pickup in banks asset quality; picks top 3

After a series of bad loan bruises, banks' asset quality is likely to improve in 2013-14. The key assumption behind this is the GDP growth estimated for the next year at 5.8% as against 5.1% in 2012-13.

"We expect India banking to improve, given the likely revival in credit demand and better deposit mobilization in a falling policy-rate context. Besides, asset quality headwinds are likely to subside, led by slower credit growth over FY11-13, lower interest rates and better industrial production," Clyton Fernandes, Kaitav Shah and Asheeta Kapadia, three banking analysts from Anand Rathi India Equities said in a report.

Anand Rathi top picks: ICICI Bank (target: Rs 1375 from current Rs 1,051), IndusInd Bank (Rs 485 from current Rs 415), ING Vysya  Bank (Rs 669 from current Rs 562) and Karur Vysya Bank  (Rs 574 from current Rs 474).

Here are some key takeaways from the report:

• Improving asset quality is key behind decent performance of bank stocks in a falling interest rate environment.
• Credit to improve; soft inflation to spur deposits.
• A likely accommodative monetary policy by RBI (100bps monetary easing in CY13), expected recovery in infra credit demand and sustained improvement in household leveraging could push bank credit growth to 16% in FY14 and 15% in FY15.
• Moreover, falling inflation would improve real interest rates, which in turn, could channel both household and corporate savings to bank term deposits.
• Estimated deposit growth at 17% in FY14 and 16% in FY15.
• NIM gains restricted by stretched credit-to-deposit. In a low real interest rate environment, banks would have limited flexibility to lower deposit rates.