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Fundamentals revisited

Fundamentals revisited

Most banks have shown resilience, preventing further deterioration in asset quality in the fourth quarter. The same quarter also proved to be healthy in terms of recovery for most PSU banks. Meanwhile, the trends of Q4FY14 numbers indicate an early sign of revival with pace of deterioration coming down significantly. RAHUL KAMAT explores the four stocks that can perform well in the long term.

The S&P BSE Bankex performance was at its best during the last six months. The index rose to 16,953.86 at the end of May from 13,001.94 in December, registering a 26 per cent jump. On a month-on-month basis too, the index has registered an impressive show. Except in January, where the month saw a de-growth of 10 per cent, the index was up by four per cent in February from its previous close. Whereas in March, the index registered a growth of 17 per cent, highest of all in the year, from its precious close. The momentum continued in April, and in the month of May as well. It registered a growth of 14 per cent on m-o-m basis. It is expected that the momentum will likely go up as the ongoing month has already witnessed a growth of two per cent.

The question arises now as to what has led the banking sector to grow at such a pace? The answer is strong performance on a quarterly basis, improvement in asset quality and the curbing of non-performing assets. Meanwhile, another surprise element identified by experts was investor inclination towards PSU banks than private. IT spoke to a few banking analysts from domestic broking firms like Angel Broking, Karvy and ICICI Direct, and found out that in FY15, public sector banks like Bank of Baroda, Canara Bank and private banks like ICICI and HDFC are the best bets. In addition, analysts are also optimistic about the performances of banks like State Bank of India, Dena Bank, IDBI Bank and Yes Bank in the current year.

Bank of Baroda

The bank registered a healthy 21.3 per cent y-o-y growth in its domestic loan book, while international advances grew by 20.2 per cent y-o-y. SME advances grew by 21.2 per cent y-o-y, while retail loans grew at 21 per cent y-o-y. The bank reported a strong performance on the non-interest income front, with a growth of 37 per cent y-o-y to Rs 1,237 crore. The Gross NPA ratio decreased by 38 basis point q-o-q to 2.9 per cent, while the Net NPA ratio decreased by 36 basis point q-o-q to 1.5 per cent.

During the quarter, the bank restructured global loans worth Rs 1,157 crore against Rs 1,213 crore in 3QFY2014. As of 4QFY2014, the total domestic restructuring in the books stands at Rs 22,553 crore, while the international restructured loan book stands at Rs 3,983 crore. Going ahead, as per the management, it is expected that loan assets worth Rs 1,300 crore will be restructured. The management has guided for a stable to improving asset quality on back of lower slippages and higher recoveries and upgrades. During FY2008-13, the bank clearly outpaced the sector in terms of credit growth, by growing at a CAGR of 24.5 per cent, thereby leading to credit market share gains.

Until the second quarter of FY13, the bank had been outperforming on the asset quality front, quarter after quarter, as its gross and net NPA ratios stood at two per cent and 0.8 per cent respectively, much lower than gross and net NPA ratios of four per cent and 2.1 per cent for all large PSUs taken together. During the last six quarters, the bank has witnessed higher asset quality pressures, as its NPA ratios have increased 96 basis point over the same period (the increase though is lower than what has been witnessed in the industry).


The housing finance industry is a competitive segment with banks having a significant presence. However, large housing finance companies like HDFC, with a dedicated focus on the segment leading to robust loan-sourcing and appraisal as well as high credit rating enabling competitive cost of funds, should be able to withstand competition from banks, even going forward. The company also has one of the most well regarded top managements in the industry as well as a well established conservative risk management philosophy.

HDFC has witnessed a healthy growth in its loan portfolio, registering a CAGR of 18.2 per cent over FY2009-14. During the period, HDFC's earnings have also witnessed an equally healthy increase of 19 per cent CAGR. These have been backed by the company's strong asset quality, low operating costs and ability to keep cost of funds on the lower side. HDFC's loan book grew by a moderate 15.9 per cent y-o-y, with loans to the individual segment growing by 26 per cent y-o-y.

During the last two years, HDFC has managed to clock a loan book CAGR of over 18.3 per cent, despite a challenging growth environment. The bank has been incrementally growing its individual loan book, much faster than its corporate loan book, over the past few quarters. During the quarter, incremental growth in the loan book came majorly through growth in individual loans, which now constitute almost 68 per cent of the total loan book. The spreads increased to 2.29 per cent for FY2014 as compared to 2.25 per cent for nine months in FY14.

During the last quarter of FY14, the asset quality continued to remain strong for the company, as its gross NPA ratio came in lower at 0.69 per cent, as compared to 0.77 per cent in 3QFY2014 and 0.79 per cent in 2QFY2014.

Canara Bank

The bank has embarked on a relatively aggressive network expansion plan. Over the past two years, the bank has added 1,155 branches and around 3,400 ATMs. Further, the bank plans to add another 1,200 branches and 3,500 ATMs in FY2015. Such a pace of network expansion should augur well to strengthen the bank's presence in India.

During the fourth quarter of FY14, the bank's loan book grew strongly by 24.3 per cent y-o-y, while deposits grew at a healthy pace at 18.2 per cent y-o-y. On the asset quality front, slippages came in at Rs 2,135 crore. Recoveries/upgrades came in higher at Rs 2,243 crore, as compared to Rs 1,061 crore in 3QFY2014 and Rs 520 crore in 4QFY2013.

During 4QFY2014, the non-interest income an increase of 31.9 per cent y-o-y to Rs 995 crore, primarily on back of robust growth in 'others' at Rs 600 crore compared to Rs 390 crore in 4QFY2013. The Fee income grew strong y-o-y by 22.4 per cent to Rs 284 crore. Overall, the bank witnessed a moderate y-o-y growth in other income at Rs 1,070 crore.

The bank sold assets worth Rs 1,400 crore to ARCs (NPA impact of Rs 700 crore). Absolute gross and net NPAs decreased by 6.2 per cent and 13.2 per cent q-o-q respectively. Thus, the gross and net NPAs reduced by 30 basis points and 41 basis points q-o-q to 2.5 per cent and 2 per cent respectively. Additionally, the bank restructured advances worth Rs 1,432 crore, thereby taking its outstanding restructured book to Rs 23,205 crore. Going forward, the restructuring pipeline for the bank over the next few quarters remains sizeable at Rs 3,000 crore.


ICICI Bank's fourth quarter FY14 non-interest income at Rs 4,360 crore ( per cent y-o-y) was aided by 16.7 per cent y-o-y growth in loan portfolio and sequential improvement in margins to 3.4 per cent. However, aided by higher non-interest income, primarily dividend from subsidiaries and repatriation gains, operating profit at Rs 4450 crore was ahead of the Street's estimates. Net profit at Rs 2650 crore (increase by 15 per cent y-o-y), though ahead of consensus estimates and adjusted for repatriation gains at Rs 2,430 crore, was in-line with analyst estimates of Rs 2,410 crore.

The fourth quarter stressed asset addition came in significantly lower at Rs 3,390 crore as against the estimates Rs 4,200 crore. Management guided for restructuring pipeline at a mere Rs 1,500 crore for the first quarter of FY15.

The bank's retail loan portfolio grew 23 per cent y-o-y (vs 15.6 per cent y-o-y growth in the domestic loan portfolio). Retail asset quality too remains comfortable with gross non performing assets and net non performing assets at 3.1 per cent and 0.6 per cent vis-a-visoverall GNPA and NNPA at 3.1 per cent and 1 per cent, respectively. Healthy capital position (tier-I 12.8 per cent) will enable the bank to be the first beneficiary of a revival ineconomic activities as the leverage comes into play. Domestic subsidiaries reported 17 per cent y-o-y growth in FY14 taking net profit to Rs 2,740 crore.

(The stocks mentioned in this report have been selected based on feedback from industry analysts. Readers are requested to do their own due diligence before investing in any of the scrips mentioned in this article).

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