Valuations rich: Time to be selective…
A quarter of the weight for the BFSI segment in the Nifty has done more
than its bit to help the Nifty scale a new 32 month high. The banking index
has run up in anticipation of the positive macro outlook. Expectation of
higher credit offtake during the busy season (H2FY11), improving NIM in a
rising interest rate scenario, higher recoveries from written off assets,
receding pressure on fresh slippages and improving return ratios have
kept the sector in focus. Most of the banks have hit fresh 52 week or life
time highs in recent period. Thus, one needs to be selective about which
stocks to hold in the sector. The industry is well on track to achieve over
20% credit growth in FY11 (recorded 19.4% growth for the fortnight
ended August 27, 2010) while deposit growth is still sluggish at 14.4%
despite the recent hike in deposit rate (40 banks have raised their deposit
rate while 26 raised their lending rate) posing a big challenge ahead.
The path ahead…
The busy season is expected to drive credit growth. Hence, we believe
liquidity in the banking system will stay tight for the rest of the year.
Hence, deposit rates will continue the uptrend. IIP growth, which bounced
back to record a 13.8% YoY jump in July after a small blip in June shows
robust growth momentum. GDP is now expected to grow at 8.5% in
FY11. However, inflation is still a dominant area of concern for the RBI.
The banking sector has been spearheading the market rally with valuation
multiples for most banks getting re-rated in the past quarter. Leaving
aside short-term aberrations in this space, we have seen that valuations
are factoring in most of the positives for FY12E for certain banks. A small
correction in PSU bank stocks on account of MTM hit on the G-Sec
investment book cannot be ruled out as yields hover near 8%.
Even though our earlier target price has been achieved for most of the
banks under our coverage, we believe that some more upside cannot be
ruled out in the near term on account of bullish sentiment and higher
weightage in the index. We believe banks like OBC, SBI, Yes Bank and SIB
would continue to see fresh upsides. We suggest profit booking in HDFC
Bank purely from a rich valuation perspective. PNB has more than trebled
in the last one year and, hence, looks stretched.
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