Mumbai: International investment bank Jefferies has found a long list of woes for the domestic banks, and said that their fundamentals are not likely to change much in FY14 in the segment.
"The fundamentals for the banking sector are unlikely to change much in FY14 given the "tepid" loan and deposit growth, "range-bound" net interest margins, and "weak" asset quality," Jefferies Monday said in its report 'Initiating on India Banks: Going Nowhere', dated April 5.
Jefferies believes banks with strong branch expansion like HDFC Bank, ICICI, and Axis could face smaller problems.
"Over the next 12 months, we believe the fundamentals of the domestic banking sector are unlikely to change much, with tepid loan and deposit growth, range-bound NIMs and weak asset quality," it says.
"Tight liquidity and weak deposit growth will be the banking sector's key challenges over FY14, much more than weaker loan growth, with the latter perhaps baked in the numbers. The strained balance sheet funding is reflected in higher loan-deposit ratios and could even create an ALM problems if growth are to be pushed," it warned.
Banks with strong branch expansion in recent times and ones that marry growth with matched funding such as HDFC Bank, ICICI and, to an extent Axis, could face smaller problems.
The report sees weaker loan growth given the falling capex sanctions and lower corporate sales growth, and the resultant stress on project financing and working capital.
"We believe retail growth will be unable to plug this gap, as aggressive growth may mar the asset quality in the long-run except for those banks that have expanded their franchise in recent times which would be able to report better growth numbers," it says.
Though in a base rate regime banks are better protected from aggressive competitive under-pricing, SBI could play spoilsport, given its aggressive yield cuts in recent times, the report said.
On the NIMs front, it is wary of the numbers given the lower loan to deposit ratios and sharper repo rate cuts, resulting in asymmetric cuts in lending/deposit rates.
"We believe SBI is the most at risk here, but we are talking of a mere 20 bps (0.2 percent) decline in the margins."
The report warns that "impaired asset formation has come off the Q4 of FY12 highs of 10 percent to about 5.6 percent in Q3 of FY13, but this is still beyond our comfort zone".
"With the window closing on regulatory forbearance for restructured assets (non-infrastructure), we foresee an increased rush for restructurings in the near-term.
"The massive pipeline of infrastructure projects that are facing huge delays makes the bottoming out argument equally shaky, adding zero sanctity to the true nature of the loan book and hence considerable difference exists as to the amount of prudential haircut required to adjust the book value," warns the report.
The report believes that "the dynamic counter-cyclical provision buffer will be an additional headwind to earnings growth for a prolonged period of time", adding it will not be surprised if the RBI asks banks to cut dividend payouts to accelerate dynamic countercyclical provision buffer creation.
The report concludes that it initiates with a cautious stance on the sector and see no material fundamental changes in the near-term.