Banking Sector Review

Key Highlights Bankex delivered negative return of 17.67% vis-à-vis BSE 500 delivered negative return of 2.04% during Q4FY09. Market Capitalization of Bankex index on March 31, 2009 was Rs 2,33,965.60 crore and during Q4 FY09 it declined by Rs 50,812.70 crore. SBI, Canara Bank and Bank of Baroda have significantly improved net profit among public sector banks while Axis Bank and Yes Bank performed better than expectation. The annual growth rate of Money supply (M3) was 20.5% (till 10th April, 2009) compared with a 21.4% increase a year ago. Bank Credit which is a major source of M3, annual growth rate was 18.5% compared with 21.2% increase a year ago. Credit growth during FY09 (March 28) had been lower at 18% to Rs. 2,770,012 crore as against RBI’s estimate of 24%. Deposit growth remained higher due to higher interest rates to Rs 3,830,321 crore, growth of 20% on a YoY basis. The growth was lead by PSU’s.

Movement in BSE BANKEX vis-à-vis BSE 500 (Q4 FY09)

Snapshot The banking sector, which had seen good set of numbers in the third quarter, reported subdued earnings in the fourth quarter of 2008-09 due to slowdown in credit growth and pressure on interest margins. The earnings performance of banking universe remained muted in fourth quarter due to lower business growth, negative impact of hardening interest rates and provisions made for concessions on restructured accounts. With inflation at nearly 0%, the threat of deflation is looming. The RBI has, thus, shifted its focus from controlling inflation to stimulating growth. We saw a series of rate cuts on part of the RBI during the past six months. For the quarter ended March 2009, we saw a 50 bps reduction in CRR to 5%, 150 bps reductions in both repo and reverse repo rate to 5% and 3.5%, respectively. State bank of India, Canara Bank and Bank of Baroda has significantly improved net profit among public sector banks while Axis Bank and Yes Bank performed better than the expectation.

Banking in Q4 FY 09 Quarterly Review Banks Income Operating Income Net Profit Growth QoQ YoY QoQ YoY QoQ YoY Allahabad Bank 2.90 19.86 -35.98 85.87 -28.52 55.80 Axis Bank Ltd. 4.51 51.05 13.57 58.12 16.09 60.89 Bank Of Baroda -0.62 28.48 2.83 181.06 6.26 172.28 Bank Of India -2.14 27.04 -31.30 10.56 -7.09 7.04 Canara Bank 2.18 22.17 6.65 62.89 2.47 54.90 H D F C Bank Ltd. -0.78 53.06 -1.42 46.43 1.47 33.91 I C I C I Bank Ltd. -11.08 -11.43 -39.26 -20.27 -41.54 -35.32 I D B I Bank Ltd. 6.30 41.09 50.64 34.27 40.89 28.03 Indian Overseas Bank -2.18 27.03 -22.89 33.35 -17.01 5.37 Indusind Bank Ltd. 2.97 32.50 -2.19 209.13 12.12 249.62 Kotak Mahindra Bank Ltd. 0.61 14.33 46.50 96.33 44.20 48.20 Oriental Bank Of Commerce -1.06 29.86 37.61 279.84 -22.35 -296.92 State Bank Of India 3.79 34.57 -9.02 41.59 10.65 45.62 Union Bank Of India 5.34 32.12 -30.20 19.52 -32.11 -12.49 Yes Bank Ltd. -9.65 69.65 -25.73 24.12 -24.27 24.20 Annual Review Banks Income (Rs. Cr) Operating Income (Rs. Cr) Net Profit (Rs. Cr) EPS PE   FY09 % change YOY FY09 % change YOY FY09 % change YOY Rs. Times Allahabad Bank 8,506.65 19.21 1,075.77 (4.13) 768.60 (21.15) 17.21 2.26 Axis Bank Ltd. 13,732.36 55.89 2,785.20 69.18 1,815.36 69.50 50.57 8.20 Bank Of Baroda 17,849.23 28.74 3,342.94 51.46 2,227.20 55.15 60.93 3.85 Bank Of India 19,399.22 34.05 4,164.43 55.12 3,007.35 49.66 57.18 3.85 Canara Bank 19,430.27 18.38 2,572.42 35.03 2,072.42 32.42 50.55 3.28 H D F C Bank Ltd. 19,622.88 58.27 3,299.26 44.66 2,244.95 41.18 52.78 18.34 I C I C I Bank Ltd. 38,696.37 (2.28) 5,116.97 1.20 3,758.13 (9.61) 33.76 9.85 I D B I Bank Ltd. 13,021.54 35.32 985.63 19.80 858.53 17.69 11.85 3.83 Indian Overseas Bank 11,237.23 28.05 1,954.30 18.09 1,325.79 10.27 24.34 1.87 Indusind Bank Ltd. 2,765.72 26.97 227.49 99.06 148.34 97.65 4.18 7.73 Kotak Mahindra Bank Ltd. 3,423.01 14.14 426.06 7.11 276.10 (6.07) 7.99 35.41 Oriental Bank Of Commerce 9,927.79 33.17 1,160.08 49.85 905.42 156.33 36.14 3.04 State Bank Of India 76,479.22 32.67 14,180.66 35.84 9,121.24 35.55 133.77 7.97 Union Bank Of India 13,371.93 26.94 2,344.55 26.64 1,726.55 24.48 34.18 4.31 Yes Bank Ltd. 2,438.34 46.42 465.91 52.02 303.84 51.90 10.23 4.88 Public Sector Banks State Bank of India State Bank of India (SBI) reported a 45.5% jump in standalone net profits to Rs 2,742 crore in Q4FY09 mainly supported by treasury gains which jumped five times to Rs 1,500 crore from Rs 296 crore. The bank achieved robust growth in its operations as its advances and deposits grew by 29% and 38% YoY, respectively, with rising market share. Full year PAT surged 35.5% to Rs 9,121 crore with NII growth of 22.6% to Rs 2,0873 crore. On the non-interest income side, SBI reported a 46% YoY growth in FY09 to Rs 1,2691 crore. The asset quality appears less vulnerable at 2.84% GNPA with restructuring done worth Rs 8,300 crore (1.5% of loan book) during FY09. The cost to income ratio improved from 49% to 46.6%. Bank of India Bank of India’s (BOI) Q4FY09 results was satisfactory. Total income grew by 27% YoY to Rs 5,278 crore backed by NII growth and PAT growth of 7% YoY to Rs 810 crore. GNPA rose by 28% YoY to Rs 2,471 crore (1.71%) while NNPA was well controlled up 6% to Rs 628 crore (0.4%). Bank of Baroda  Bank of Baroda (BoB) reported better than expected results as net profit increased by whooping 172.3% YoY to Rs 753 crore primarily led by higher non-interest income and lower provisioning. BoB has been able to show continuous improvement in the NIM (domestic), which improved to 3.21% in FY 2009, compared with 3.06% in FY 2008. The NIM increased on account of a. 65bps YoY increase in the yield on investments The Bank has consistently improved its asset quality, maintained its margins, and grown steadily in the business. Unlike other banks, BoB has continued showing improvement in its asset quality by maintaining lower delinquencies. During the quarter, gross NPAs decreased 4.1% QoQ to Rs. 1,842 crore. Canara Bank Canara Bank’s Q4FY09 net profit growth was robust at 55% YoY to 718 crore, driven by strong 41.5% YoY NII growth and high trading gains at Rs 350 crore GNPAs improved substantially 8bps QoQ to 1.56. Private sector Banks Axis Bank Axis Bank (AXB) declared a robust set of results. AXB reported 60% YoY PAT growth to Rs 581 crore. The buoyancy in the PAT can be attributed to huge treasury gains coupled with better operating efficiency that lead to a 2% QoQ decline in operating expenses. The growth of the total business moderated to 35% in Q4FY09 as compared to 50%+ growth rates registered by AXB in previous quarters. The core fee income also grew robustly at 42% YoY. The large & mid-corporate segment, Agri & SME banking and treasury segment mainly contributed to this. On the asset quality front, the GNPA and NNPA stood at 0.96% and 0.35%, respectively. Advances and deposits growth moderated to 37% and 34%, respectively. Yes Bank A steep rise in NII boosted the bottom-line by 24% YoY to Rs 80 crore. NII growth was contributed by income from investments where the bank had high coupon corporate bonds, which yielded 11-12% in this quarter that were invested in Q3FY09 and have started yielding returns from this quarter. The dampener to this show was that NPAs, GNPAs for the bank grew to Rs 85 crore (0.7%) and NNPA to Rs 41 crore (0.3%), which was non-existent in the corresponding quarter last year. HDFC Bank HDFC Bank (HDFCB) reported a net profit of Rs. 630 crore in Q4’09 (up 1.5% QoQ). This growth while weak, should be viewed in light of the weak economic environment notwithstanding declining interest rates, the Bank’s NIM was stable at 4.2%. Skillful franchise leverage resulted in CASA improvement and growth in fee income. Asset quality remained under control, resulting in minimal asset-restructuring, and only a 4% rise in gross NPAs. While the loan book remained flat, this was unexpected.

Banking on Bourses

During Q4FY09, PE multiple of BSE-500 index hovered in the range of around 11x to 14x. During last week of March it touched the high of 13.93x while low was in January 2009 to 11.35x. While BSE Bankex’s PE multiple moved in a range of 5x to 11x during the quarter and reported lowest in the 2nd week of March to 5.94x while highest in the first week of the January to 10.64x. During Q4 FY09, Bankex delivered negative return of 17.64% whereas BSE-500 rendered negative return of 2.04% for the same period. In BSE Bankex all banks scrips delivered negative return. HDFC, Union Bank of India and Canara bank were among least losers.

Top Ten Performers in BANKEX (Based on closing prices)

Company Name 31-Mar-09 (Rs) 31-Dec-08 (Rs) Return (%) H D F C Bank Ltd. 967.85 997.60 -2.98 Union Bank Of India 147.25 163.00 -9.66 Canara Bank 165.90 187.80 -11.66 Indusind Bank Ltd. 32.30 37.65 -14.21 Federal Bank Ltd. 138.10 162.00 -14.75 Bank Of Baroda 234.55 280.45 -16.37 Karnataka Bank Ltd. 65.20 78.70 -17.15 State Bank Of India 1,066.55 1,288.25 -17.21 Axis Bank Ltd. 414.50 504.65 -17.86 Kotak Mahindra Bank Ltd. 282.90 357.30 -20.82

Global Scenario Conditions in global financial markets deteriorate with the freezing of inter-bank markets in US and Europe necessitating massive liquidity injection facilities from central banks in these economies. Reduction of policy rates, recapitalization of troubled private banks by governments, coordinated action by European governments to bail out weak banks and guaranteeing of all deposits in the banking system in many countries. During fourth quarter earning report of banking sector was passable. Hopes for a recovery of the global financial sector were boosted when JP Morgan Chase reported better-than-expected quarterly profits after a record performance at its investment bank. JP Morgan made a profit of USD2.1bn, or USD0.40 a share, in the first three months of the year. Although that was lower than the USD2.4bn result achieved a year ago, it beat analysts' consensus forecast of a profit of USD0.30 a share. Goldman Sachs reported a 13% surge in quarterly profits to USD1.66bn, also better than expected. The results sparked hopes that the banking sector may be on the road to recovery. Wells Fargo also stunned markets last week when it declared it had finished its best quarter ever. The San Francisco-based bank said it expected to report first-quarter profits of about USD3bn. European central Bank and Bank of England slashed its benchmark to boost economic growth and increase the availability of credit.

Outlook  FY09 would be a peak performance year for banks as: (1) liquidity tightness offers pricing power; and (2) asset quality remains manageable and largely benign. However, the severity of decline would be determined by control on cost of funds and ability to grow CASA at faster pace (as term deposit rates have reduced significantly it can expect that  margins will decline for PSU banks in FY10, fee income growth to moderate and NPA costs to rise. ROA (Return on Assets) and ROE (Return on Equity) would be lower in FY10 compared with FY09. Investors should prefer banks with lower costs of funds and higher provision coverage. Canara Bank, Bank of India and Allahabad Banks are trading at very low PE (at price of March 31, 2009) and will be right choice for investment while Kotak Mahindra Bank and HDFC Bank are overvalued. Investors also can take a bet for SBI for the strong liability franchisee; however asset quality risks are higher.