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Earnings Season Snapshot - H1 FY 2013-14 - Banking Sector

Posted on the 22 November 2013 by Rupyagyan @RupyaGyan
The second quarter results of the banking sector were as per the expected guidelines. The blue chip companies in this sector were on the market radar from the start of this earnings season itself.

The Sector As a Whole :

The underlying stress in the economy reflected in the asset side of the balance sheets of the banking sector. The top 13 banks representing 90% of the banking sector experienced a jump of 43% in fresh asset defaults as the NPL in H1 of FY13-14 along with asset restructuring rose by 81%.

Performance Glimpses :

Private sector banks are still preferable over their PSU counterparts due to their ability to maintain asset quality in better order in a cyclical downturn scenario. Below is presented the data for some of the top banks in the country :
All Data Q1 vs Q2 FY 2013-14

SBIPNBBank of BarodaHDFC BankICICI BankAxis Bank

Gross NPA5.64% vs 5.56%5.14% vs 4.84%3.15% vs 2.99%1.09% vs 1%3.08% Q21.19% vs 1.10%

RestructuringN AN AN A0.2% of Gross AdvanceN AN A

Cost/Income Ratio59.35 vs 52.7646.30 vs 43.3545.08 vs 40.4946.42 vs 47.8937.3 vs 3941.53 vs 38.80

The above data clearly shows that the Gross NPA of PSU banks have grown in percentage and is higher than private sector banks. Except SBI other PSU banks have reported higher YoY profits but QoQ performance was dismal as expected by the markets. The Cost/income ratio gives a basis for operating performance where again the private banks have performed better than PSU banks. A higher cost/income ratio dents the profitability of the bank in addition to higher asset quality deterioration which is indicated by the growth in gross NPA leading to higher provisioning YoY.

Takeaway :

With the country’s GDP coming to a low of 5% for the year FY14 from a high of 9% some years earlier, it is not a surprise that the banking sector is trapped in a cyclical low due to the other macro-economic constraints affecting the sector. Once there is a turnaround, the sector is bound to experience growth with consequent higher valuations. It is advisable to choose some better managed banks in your portfolio for the longer term and wait for the sector to come out of the woods.
This opinion goes with the philosophy that it is wiser to use the opportunity presented by the low side of economic cycle and time your investment to reduce downside risk rather than investing in a stock without due-diligence during the high tide with greater risk.
Watch this space for earnings updates of other sectors.
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