Banking Sector - Downgrading PSU Banks to Factor in Increasing Concerns

BSE Index Analysis, Securties , Standard Experts

Banking Sector - Downgrading PSU Banks to Factor in Increasing Concerns

Profitability of PSU banks to be under pressure

As per media news, PSU banks have been advised to cut lending rates and increase their focus on achieving agriculture loan targets. We believe any such intervention on day to day functioning of the banks will be an added negative and may also impact the profitability / growth of these banks. We are downgrading our multiples across PSU banks to factor in increased risks emanating from declining margins and continued asset quality concerns.

My view

Aggressive base rate cuts by PSU banks will be negative for earnings as NIMs are expected to decline in coming quarters. This is due to the fact that ~60% of advances are linked to base rates and deposits will be re-priced with a lag. Moreover, with recent slow accretion to deposit base may act as a hurdle / reduce ability of banks to cut rates on the resources side.

Any decisions taken under pressure without economic viability will be negative for banks. We are downgrading our multiples across PSU banks to factor in increased risks emanating from declining margins and continued asset quality concerns. OBCⳠmultiple has been downgraded relatively more to factor its higher asset quality concerns.

We recommend Overweight stance on Private Banks due to better earnings visibility and asset quality being under control. We prefer ICICI Bank, HDFC Bank and ING Vysya. We are downgrading SBI, Canara & Union Bank from BUY to HOLD.