BNP Paribas on Banks: Time to book profit

Time to book profit

Time to book profit: We recommend investors to book profits in Indian
banks as the price run across the sector fully discounts the expected outlook in
terms of loan growth, margin expansion and declining credit costs. Many stocks
in our coverage universe are trading at extremely rich valuations, at or over +1
standard deviations from their historical mean valuations. The sector has
outperformed the broader market very handsomely (by over 17%) since our
upgrade of the sector on July 2, 2010. We believe it is time to book profits.
Key changes in our recommendations:
􀂃 BOI to Sell from BUY – credit cost turnaround largely priced in
􀂃 PNB, BOB and UNBK to HOLD from BUY – rich valuations, hence book
profits
􀂃 HDFC Bank to HOLD from BUY - rich valuations, hence take some money off
the table
Current valuations pricing in blue sky and key risk to the thesis:
The price run in the sector appears excessive and looks to ignore some potential
threats in the form of lower than expected credit growth, margin expansion lower
than expectations due to deposit competition and for PSU banks further slippages
from their restructured loans. There is simply not much margin of safety left now.
The continued surge of foreign portfolio investment into the banking sector is the
key risk to our thesis. Our valuation gap analysis (highlighted in exhibits 3 & 4)
indicates that private sector banks are better leveraged to liquidity driven multiple
expansion than PSU banks. The valuation gap between the private sector banks
and the PSU banks expands during bouts of liquidity inflow. While the PSU banks
have improved their act significantly over the last few years, the current multiples
already price that in and any further re-rating will have to wait for its time. So we
will be more biased towards the private sector banks.
Where to hide in the banking sector: We reiterate a BUY on ICICI
Bank and Axis Bank with revised TPs of INR1270 and INR1750. We do not see
any significant negative catalysts for these banks and we see further scope for
multiple expansion from the current levels.
Valuation
At our revised TPs, Axis would trade at 3.4x and ICICI at 2.0x FY12E ABV.