Going by the earnings of most banks in the first quarter of the financial year, private banks scaled past most public banks in terms of loan and deposit growth. The top three private banks, ICICI Bank, HDFC Bank and Axis Bank, maintained consistency in their earnings but most state-run banks showed moderate growth in their earnings.
Asset quality deteriorated more than expected for public banks because of their exposure to retail loans, said brokerage BRICS Securities in a report today. This is also because troubled accounts are often restructured before they turn bad. Mid-tier public banks also run the risk of large slippages as they have large, chunky corporate loan portfolios in the books.
Brokerage Nirmal Bang has been negative on the banking sector for a while now as it expects the economic slowdown to prolong. "Much of bank lending in the industry is to corporates and, therefore, both public as well as private banks would get impacted," Hemendra Hazari of Nirmal Bang told ET Now in an interview recently.
Even Nomura has downgraded Bank of Baroda to "reduce" from "neutral" and cut its target price to Rs 590 from Rs 628 as it believes the state-run bank's asset quality will continue "to derail" its earnings growth over the next several quarters. It increased BoB's delinquency forecast for fiscal 2013 and its loan loss provisioning forecast for fiscal 2012.
Another "key risk" event is the expected change in the top management later in calendar 2012, Nomura added, saying "this transition is likely to reiterate the asset quality risk to earnings."
Nomura also downgraded Punjab National Bank to "reduce" from "neutral" and cut the target price to Rs 680 from Rs 719. The investment bank said that loan delinquency will continue to increase over the next few quarters, while Punjab National's "high" proportion of restructured loans is an added risk.
Bank of Baroda shares rose 1.3 percent, while Punjab National gained 0.8 percent.
With inputs from Reuters