Financials Sector Results

In the last quarter, banking stocks have been hammered due to multiple concerns and ensuing expectations of weak sector earnings in Q4FY08. We foresee muted NII performance in Q4FY08 especially PSU banks, owing to slower credit growth and negative pressures on margins outweighing the positives in the short-term. Also, strong treasury gains of Q2FY08 and Q3FY08 would be amiss this quarter, given the high volatility in equity markets. Banks’ AFS bond books would suffer from MTM provisions with yields reining higher than the December 2007 cut-off level (by ~15bps). On the other hand, private banks (excluding ICICI Bank) would continue to march on with robust bottom-line forecasts, driven by strong loan growth, stable-rising NIMs and robust fee income growth. This strong income profile would enable these banks to absorb the expected downside in derivative business (fees and MTM losses). While increased credit losses on the unsecured retail portfolio would dent profits of these private banks, ICICI Bank would be additionally hit by MTM provisions on credit derivatives. We expect a 13% yoy growth in NII and 19% yoy rise in net profit of our banking universe for Q4FY08. Axis Bank, HDFC Bank and Bank of India are our top result picks for Q4FY08 with least risk to earnings forecasts.