Banking (Q3 FY10) Sector Review

Banks under our universe reported a healthy 11% qoq growth in net profit. On a yoy basis, this however was low at 1.3% yoy, largely due to lower trading gains and higher provisions. Net interest income for our universe grew 11.1% yoy (12% qoq) on account of decline in interest cost. This led to ~3-40bps increase in NIM for few banks. Non-interest income for most banks declined due to exceptional trading gains during Q3 FY09, volatility in bond markets and muted credit off-take. Pre-provision profit remained flat despite decline in operating cost. Except ICICI Bank (down 6.1%) and Canara Bank (up 0.7%), all other banks reported a strong 4-15% sequential growth in loan book. Deposit growth has been moderating for last two quarters and the impetus placed on garnering retail and CASA deposits seems to have geared pace.  Asset quality has been deteriorating for last two quarters. We continue to prefer BOB, PNB in PSU space and HDFC Bank in private space.