The search for a pan-India franchise * Regional banks have differentiated themselves from PSU banks on
asset quality and now trade at a premium to PSU banking stocks. Their profitability and valuation differential to large private sector banks has, however, persisted, owing to higher cost of funds, low fee income generation and higher cost to income. The improvement on all these three parameters, we find, is related to the quality of the liability franchise, for which geographical diversification is the only lasting solution. The evolution of ING Vysya Bank (IVB) also proves the significance of geographical diversification. Even as Federal Bank (FB), Karur Vysya Bank (KVB) and South Indian Bank (SIB) manage their asset quality risks, their operating performance would remain constrained due to their liability franchise. City Union Bank (CUB), on the other hand, has done better under similar constraints and looks likely to outperform its peers on growth and profitability. * *Improving the liability franchise is key: *A comparison of large private sector banks and PSU banks with regional banks shows that regional banks have been able to differentiate themselves from PSU banks on asset quality (FY13 credit costs of ~60 bps vs PSU banks’ 114bps); however, they continue to lag large private sector banks on the cost of funds (due to lower CASA), fee income generation and operational efficiency. Given that primary banking relationships deliver 2-3x more business than secondary banking relationships in India and given that the liability relationship (rather than the lending relationship) is the determinant of a primary banking relationship, the improvement in the quality of the liability franchise would be a key driver for regional banks to bridge the profitability gap vis-à-vis large private banks. * Geographical diversification proving to be a necessary evil: * Geographical diversification is crucial for regional banks if they are to improve their liability franchises. IVB has set a good example in this regard, but the other regional banks remain laggards on this metric and this affects their operational performance. Regional banks’ operating profits have recorded 15% CAGR (in FY11-13) vs large private banks’ 22%. ** *Asset quality is a key near-term risk: *The asset quality outlook for these banks is rather bleak, with rising delinquencies and higher credit costs looming large. Our scenario analysis shows that IVB and FB are better cushioned on provision coverage and capital ratios. ** *Recommend BUY on IVB, FB and CUB, SELL on KVB and SIB: *We initiate coverage with a BUY stance on IVB (due its proven competitive advantages). We retain our BUY stance on CUB (due to its strong growth and profitability trends) and FB (as structural concerns on operating performance seem discounted). We initiate coverage with a SELL stance on KVB and we change our stance to SELL on SIB due to pressure on their profitability ratios from deterioration in operating performance as well as due to asset quality risks. -- -- For Anything related with Stock market be Online at http://www.niftyviews.com/ Get free updates on your mobile phone. Sms "Join TSR " and send to 09223492234 FOR TRIAL STOCK/NIFTY/OPTION CALLS You received this message because you are subscribed to Google Group "STOCKRESEARCHER" group. To post to this group, send an email to [email protected] To unsubscribe email [email protected] for more info visit http://groups.google.com/group/STOCKRESEARCHER?hl=en-GB . This is Not a Spam Mail. Disclaimer :- "The opinions expressed by the members on this board are based on their individual experience and perceptions and to share information with other members with the best of intentions to help fellow members in investment decisions as equity investment is a risky venture." --- You received this message because you are subscribed to the Google Groups "TEAM STOCKRESEARCHERS" group. To unsubscribe from this group and stop receiving emails from it, send an email to [email protected]. For more options, visit https://groups.google.com/groups/opt_out.
