Motilal Oswal has come out with a report on banking sector. The exhaustive report on the sector also covers individual stocks i.e. Bank of baroda, Canara bank, Punjab National Bank, State Bank of India, Union Bank represent the public sector banks.
Among the private sector banks all the major ones are mentioned separately: Axis Bank, HDFC Bank, ICICI Bank, IndusInd Bank, and Yes Bank.
The brokerage house considers that loan growth of approximately 20 per cent coupled with operating leverage and with fall in credit cost push the sector's profitability over the next two years (FY12 & FY 13).
There could be an additional positive surprise because of higher recoveries according to the report by Motilal Oswal. The argument is that during FY09 and FY10, all banks had allocated a high proportion for non-performing assets. This was done in view of the financial crisis. Now that we are moving towards normalcy, a lot of these assets will be recovered.
The report stated, “Private banks are well placed in terms of asset quality as retail delinquencies have peaked and due to conservative restructuring policy adopted in the past. Meanwhile Banks like SBI, PNB and Union Bank, which posted higher slippages, can surprise positively with a fall in slippages, higher upgradation and recoveries."
Motilal Oswal states that the operating cost will grow to its peak in FY11 for PSU banks as full pension provisions for retired employees and wage revision will be provided for. Regarding private banks', the operating expenses will rise in wage and rental inflation, large scale branch expansion. However, due to strong core operating income, it is expected, the cost to income ratio to remain stable.
Concerns related to margin pressure are high due to continued liquidity tightness, a fast rise in wholesale borrowing costs and also a rise in retail term deposit rates by 150-300 basis points across maturities.
The report also looks into regulatory framework regarding banking sector.