Banking Sector Looks Outperform

 It seems that risk-returns are more favorable in select private banks (Axis, ICICI and Yes Bank) over PSU banks.
 Asset quality and NIM (net interest margin) are expected to be under pressure for PSU banks as the macro environment is challenging.
 In these areas, private banks are expected to perform better due to their better ability in managing these issues.
 PSU banks NIM is expected to be weak due to tight liquidity and lack of loan demand inducing lending rate cut while deposit costs remain stickier. In this situation, PSU banks NIM is expected to drop by 40-45bps in FY13 while private banks are expected to manage margin drop in the range of 15-20 bps.
 Largest drop in margins of PSU banks are expected in 1HFY13 whereas the average yoy drop may be lower.
 Going forward, critical variables affecting banking sector are government’s efforts in kickstarting infrastructure investment, RBI’s credit policy and the budget and fiscal assumptions therein, which would give a sense of the extent of fiscal consolidation that the government wants to achieve.
 It is expected that RBI would cut CRR by 50 bps on March 15 for easing liquidity conditions and also to prepare the ground for banks to start reducing lending rates.
 After the recent rally in stock prices, it appears that valuations of PSU banks are fair on FY13 basis.
 Considering pressures on margins, asset quality and restructuring pressures of PSU banks, private banks with higher capital base and improving RoE are preferred from the investment angle.