Though public sector banks are likely to post healthy September quarter results, experts feel that credit growth still remains a concern.
PSU banks will see strong growth. ?However, credit growth for PSU banks remains a concern,? he added.
According to him, Canara Bank?s September quarter saw strong net interest income (NII) due to net interest margin (NIM) expansion. Hazari sees other PSU banks like State Bank of India and Union Bank to post strong NII growth in September quarter.
Below is a verbatim transcript. Also watch the accompanying video.
Q: Canara Bank has reacted very well to its results yesterday. What did you make of it?
A: The net interest margin (NIM) of this bank has increased significantly and that has led to a very strong net interest income (NII) growth. This is a trend that you will see with many PSU banks which will report in the second quarter (Q2). That is because the base rate was introduced in July. Banks such as Canara Bank, which in our opinion was doing a lot of sub-base rate lending, all such lending would have got re-priced higher and that is why you are seeing this impact in their Q2 results.
Going forward, if you see a lot of banks have increased their base rate even in October. Third quarter (Q3) numbers should be positively impacted by this trend. But what is interesting to note is that those banks which had done a lot of sub-base rate lending, like Canara Bank, SBI and Union Bank, you should see a tremendous boost in NII in Q2.
Q: So you think SBI and Union Bank are next in line for some NIM surprises?
A: Yes, I would imagine so.
Q: What about the two which are reporting today, Corporation Bank and Allahabad Bank? What kind of numbers are you expecting from them?
A; We don?t cover both these banks. In our banking universe which consists of a lot of PSU banks in general, we are expecting 20% growth in net profits. I would expect the banking industry to come up with strong numbers in Q2.
Q: Provisions have gone up for Canara Bank but other income has come down? What are your observations on these two metrics?
A: By and large that was expected. A sharper fall in other income we were expecting treasury profits to be somewhat higher. That is because they had booked a lot of treasury profits in Q2 of last year. Despite that, their NII was significantly higher than our estimates.
Even though their net profits were below our estimates, overall their core income was stronger and therefore we have upgraded the stock further as one of the few banking stocks which we are recommending investors to buy.
Q: HDFC Bank?s NIMs are down marginally this quarter to 4.2%. Any reason to be concerned here?
A; Yes, because if you see HDFC Bank had the benefit of equity funds in the Q2 which have no interest cost as compared to Q2 of last year. Despite that, if their NIMs have remained constant at 4.2%, that would indicate that on their portfolio they had quite a lot of pressure on their NIMs.
Q: What about Axis Bank? While the numbers are not bad, a lot of people seem to be a little wary of valuations. Where do you stand on that?
A: If you see some of these large new private banks like HDFC Bank, Axis Bank, you will find the EPS growth is probably more indicative of performance than net profit because of the equity issues that they have had. In both cases you will find the EPS growth has been about 23%. These banks are really valued at 4.5-3.5 times book value. For a 23% earnings growth, I am sure PSU banks at the valuations they are commanding are attractive.
Q: What would this quarter be for ICICI Bank?
A: We do cover ICICI Bank. We expect somewhat moderate growth in earnings there. We are not expecting anything great but in the general banking industry, I don?t think any one should really disappoint very sharply on the net earnings.
Q: You flagged off a potential surprise in Canara Bank. Which are the other public sector banks you think can surprise on the way up with their earnings, aside of Union Bank that you spoke about?
A: I think Syndicate Bank, although it did not do much of sub-base rate lending. But there has been a quiet transformation taking place. NII going forward, should see an expansion and a very healthy growth.
I would also like to flag off an interesting development in Canara Bank. If you see the break up of their credit growth you will find that baring housing and retail loans, the rest of the sectors including infrastructure has shown a decelerating trend. This is a cause of worry because this would indicate only housing is growing today.
Q: That is an interesting point because generally there have been lots of notes of concerns from the public sector bankers for credit growth of this year. Most of them privately tell you that it has not picked up to the extent they thought it might. Is that an area of concern for you?
A: Yes, because Canara bank is a very large PSU bank and since they have released numbers we can analyze it. Baring housing and retail, and a larger chunk of retail is housing, in the rest of the segments, the credit growth has decelerated QoQ and infrastructure in Canara Bank?s case has been totally flat.
Infrastructure was a growth area for the banking industry. One has to view all these numbers with more caution about credit growth going forward.
Q: What do you think is stifling credit growth?
A; If you see the IIP numbers and you do a two-three month moving average, you will find that there is a very clear weakening trend since January-February. It is not just the surprise you found in September although some people are saying September is an aberration.
The trend is clearly weakening. We were expecting credit growth to take place on the back of growth in industry. But the IIP numbers since January are showing some cause of worry.
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