Analyst Research Report Snapshot

Title:

Spark Capital : Financials Sector Strategy for CY13

Price:

$253.00

Provider:

Spark Capital Advisors(India) Private Limited

Date:

14 Jan 2013

Pages:

24

Type:

AcrobatPDF

Companies referenced:

AXBK.NS BOB.NS BOI.NS CHLA.NS CNBK.NS CRBK.NS CTBK.NS DWNH.NS FED.NS HDBK.NS ICBK.NS IDFC.NS INBA.NS INBK.NS IOBK.NS KARU.NS KTKM.NS LICH.NS LTFH.NS MMFS.NS MNFL.NS MUTT.NS PNBK.NS PWFC.NS RURL.NS SBI.NS SIBK.NS SRTR.NS UNBK.NS VYSA.NS YESB.NS

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Summary:

Financials Sector Strategy for CY13 Too Late to turn Bullish; Too Soon to turn Bearish Backed with expectations of monetary easing, lower wholesale interest rates, as well as attractive valuations, we began CY12 with plenty of optimism on absolute stock returns from the Financials sector having upgraded more than half the 30 stocks in coverage between Oct’ 11 and Jan’ 12. Specifically, we recommended investors to increase exposure to high beta names such as IDFC (our top pick among NBFCs), ICICI Bank, Axis Bank and Yes Bank. Our views were polarized with a heavy bias towards Pvt Banks, select NBFCs and against PSU Banks. However, we enter CY13 with a lot more caution given our expectations of how we see the macro environment taking shape, asset quality outlook and top quartile valuations. Our judgment is that CY13 should end up with negligible returns for the Financials sector as a whole with positive returns in the first half offset by negative returns during the second half. This view of CY13 having two disparate halves is driven by our expectation that the current build up of momentum and positive expectations on the monetary, fiscal, liquidity and overall sentiment on growth front has legs to last a while longer but may peter out as we head towards 2HCY13. As a result, we do not change our current stock ratings now but would look to recommend lower exposure to high beta names as we head into late 1HCY13. A few reasons for that: Firstly, we see monetary easing to continue in 1HCY13 with more CRR cuts, increased OMOs to ensure that liquidity is comfortable and M3 growth is atleast on par with nominal GDP growth. However, we expect no more than 50 bps of repo rate cuts contrary to market’s expectations of higher repo rate cuts. We think RBI would not cut repo rates aggressively subsequently given that real interest rates are just marginally positive, M3/ deposit growth is at multi-decade low inspite of CRR cuts & OMOs in excess of Rs. 3tn over the past year and inflation risks remaining high due to fuel/ electricity price hikes. Our recommended strategy would be to reduce exposure to the sector when expectations increase after the initial rate cuts. Infact, we believe that the unlikely scenario of aggressive repo rate cuts would be counter-productive and might have the undesired effect of actually increasing deposit rates. Secondly, we observe that right from 1970s, almost every year leading to a general election has seen fiscal profligacy and ironically, during FY03-04, when the fiscal deficit improved, the incumbent lost the election. Higher fiscal deficit has the double effect of rising bond yields and slowing M3 growth. We do not expect FY14 to be any different with likely populist measures on MSP increases, farm loan waivers, food security etc. Our recommended strategy would again be to sell into a rally, if the budget is not populist as the rest of FY14 is likely to be so! Thirdly, on the asset quality front, we believe that the worst of infrastructure/ related sector NPAs/ restructured assets are ahead of us and not behind us. We think the challenges are not a quick fix and as a result, we would use positive announcements on coal pooling , SEB debt restructuring etc to reduce exposure. Finally, we think the momentum on capital raising can continue and many banks should be looking to shore up their equity base, due to which the actual valuation multiples could actually be lesser than it appears.

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