Banking Divergence

Not just PSU banks, but even private banks are diverging…

The banking results for the fourth quarter ending March 2017 have just about started coming, but the first signs of divergence are already visible. There has been a divergence between private banks and PSU banks for quite some time. That was on the parameters of growth, margins, profitability, NIMs and the quality of assets.

The divergence is evident from the fact that HDFC Bank alone has a market valuation that is higher than all the PSU banks (including SBI) combined. That gives you an idea of the amount of wealth that Private Banks has created in the past few years at the expense of the PSU banks. But now the divergence within the private baking space is becoming clearer.…

Legacy versus non-legacy assets… 

This is where newer banks tend to have a distinct advantage. However, even within the private banking space, there are clear cases of legacy assets putting pressure. For example, IDFC Bank is up against a major problem of legacy infrastructure assets inherited from IDFC. Similarly ICICI Bank has a problem with its own legacy as a financial institution as well as its legacy of aggressive growth through the 1990s and 2000s. On the contrary, banks like HDFC Bank, Kotak Bank and IndusInd Bank have managed to overcome the legacy problem more successfully. This is only going to sharpen the divergence.

Quality of assets is the key… 

Even within the private banking space, there are some banks that have managed the quality of assets much better. This has been done through a low risk focus, flexible allocations and tighter risk controls. An HDFC Bank, IndusInd Bank and Yes Bank have managed to rein in their Gross NPAs at below 2% and that has held them in good stead. On the contrary, Axis Bank, IDFC Bank and ICICI Bank have serious problems of asset quality. While it is partly to do with legacy assets, it is also to do with aggressive and target-based lending practices. It is hardly surprising that currently Kotak Bank commands a market cap that is higher than ICICI Bank despite being much smaller in size. 

Divergence in NIMs…

The Net Interest Margins (NIMs) represent the gap between the yield on funds and the cost of funds. Banks, within the private space, that have built a strong retail franchise have managed to beat the slowdown in infrastructure sectors. Such banks have boasted higher NIMs and also better valuations. A look at the private banks points towards HDFC Bank, IndusInd, RBL Bank and Kotak Bank as the ones with attractive NIMs. They are also the ones to quote at a much richer P/BV and P/E. The divergence has been profound even within the private space. The writing is on the wall for the weaker banks. ©

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