ICICI Bank, HDFC Bank Safe Finance Bets For Bernstein As Asset Quality Woes Dissipate

Large private banks, ICICI Bank Ltd. and HDFC Bank Ltd., remain preferred safe bets in the finance sector for Bernstein's Pranav Gundlapalle, who advises investors to bottom fish.

The senior research analyst also prefers IndusInd Bank Ltd. as a 12-month idea as he noted that the lender was among the ones that have taken a big hit in anticipation of asset quality woes. Meanwhile, he said the woes of microfinance institutions seem to be coming to an end, he said.

"Across the MFI space, given these are one-year duration products and tightening started in June last year, we are more than halfway through the life of the product and at the bottom in terms of asset quality issues," he said. But he also noted that the MFI space was unlikely to see a clean quarter in March.

"I think the MFI space across board has seen bad numbers, but that was largely priced in and it was slightly better than expected," he said. Overall, on the asset quality front, these issues are confined to MFIs and a few pockets of consumer lending, said Gundlapalle.

Given Yes Bank Ltd.'s limited exposure to the consumer lending segment, it has not seen broad-based deterioration in consumer asset quality, he noted. He added that going into the December quarter, a big concern was if asset quality issues would spread from personal loans and credit cards to the broader consumer lending segment. However, that has not played out, which is a positive signal, according to Gundlapalle.

Gundlapalle said ICICI Bank saw another stellar set of numbers with a big positive being no deterioration in asset quality; the lender managed to keep ROA at 2.4% helped by low credit cost and operating expenditure staying low. Overall, while it reported a positive set of numbers, what slightly disappointed the Bernstein analyst was the headline growth, which was lower than expected, but that was offset by strong CASA growth.

In addition, lending growth does have a bearing at this point, he said, and noted that at a system level "we need to get back to 12–13% growth without a major rebound in consumption lending".

The growth is available in other segments where margins are not as high and barring a big relief in the Budget, Gundlapalle does not expect a jump in consumer lending. Therefore, larger diversified lenders are preferred, he said.

For the MFI industry, key monitorables include a pickup in asset quality, RBI regulatory action, and a pickup in disbursal growth, according to him.