By Ruma Dubey

Almost all the banks that matter have declared their Q2 numbers with the largest, State Bank of India declaring its numbers today. And based on these numbers, let us have a look at a comparative analysis of how these banks pan out.

In the short term, the sector might look a bit dicey given the deteriorating asset quality, especially for public sector banks and the dull macroeconomic indicators.  But in the long run, banks are the very edifice of our nation and once the economy starts showing signs of recovery, the rate cut cycle begins its journey, banks will once again a much sought after sector.

Let us take a look at each factor which is today affecting the investment decision. Undoubtedly, at the top of our mind, is the asset quality. So let us take a comparative look at this most decisive factor first. We have compiled the data based on the five largest PSU and private sector banks.

ASSET QUALITY:

At this juncture, amongst PSU banks, for the size of PNB, its asset quality seems to be the worst hit amongst the top five and what is worrying is that the management while presenting the Q2FY13 numbers did not give any indication of how the situation could pan out in Q3. Slippages are expected to remain high, meaning further fall in NIM. To counteract this, it could go into a consolidation phase and that will also leave some telling effect on the performance.  Union Bank is the best placed because if one calculates the net slippages, it is the only PSU bank in these five, to have a -0.16% net slippage. PNB stands at 5.5%. A further deterioration in the economy will hurt banks with higher NPAs.

The private sector bank does stack up much better and YES Bank scores top notch, followed by HDFC Bank. NIMs have held up or improved for most banks with ICICI and  YES surprising on margins. YES has provided for its exposure to Deccan and though its exposure to Suzlon is also pretty huge, the bank seems to have the ability to manage this stress. ICICI Bank is also back in the reckoning and many brokerage houses have given a buy call on the same.

PROFITABILITY

Here PNB does well despite asset quality deterioration. In terms of NII and net profit, SBI is way ahead of the others. And in NIM, surprisingly, PNB scores high  and even in CASA, it is ahead of SBI and the rest. But as we mentioned earlier, going ahead, the profitability of PNB could get affected due to stress on asset quality and thus, if at all one has to bet on PSU banks, it has to be SBI. The best are indeed the private sector banks and on the top emerges ICICI Bank, scoring highest when it comes to net profit, advances and branches. HDFC scores high when it comes to NIM and CASA. But the same YES Bank which scored so high on asset quality, comes last when it comes to profitability. It also has the lowest CASA amongst the top five. Axis looks good, a tad ahead of IndusInd.

VALUATION

Looking at the PE , PSU banks are much cheaper than private sector banks. In PSU banks, SBI leads followed by Canara Bank. Not surprisingly, PNB has the lowest PE in these top five. Private sector banks are quoted at a much higher valuation and HDFC Bank is way ahead of all, which to some extent means, it has capped gains for the future. Axis Bank is the lowest while IndusInd and ICICI Bank are in the good and affordable range.

Clearly, if banking sector is your preference, then private sector stocks should be the first choice and within it, Yes Bank followed by Axis Bank looks good while one can continue to hold HDFC Bank and ICICI Bank, though remember, declines could be used as an opportunity to accumulate. In PSU Banks wait for the air to get cleared and things to settle. No point banking on them now when you could get an opportunity later.