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• Indian banks have corrected quite sharply in recent weeks, largely on
concerns from microfinance and telecom exposures, and the knock-on
impact of the bribery scandal on real estate exposure. We think the
impact is being overestimated and see this as an entry opportunity with
ICICI, Kotak Bank, and BOB as our top picks.
• MFI– not a major concern: Microfinance companies are generally well
capitalized and we do not see the defaults in Andhra Pradesh causing
large-scale defaults. The exposure is low and small defaults should not
be game-changing.
• Telecom – banks well protected: There have been concerns that the
telecom exposures of banks could go bad, given the TRAI's
recommendation of cancellation of licences. We believe that the
cancellation is not a certainty, and banks claim that they have additional
collateral from the smaller operators.
• Bribery scandal – isolated so far: The bribery scandal has not emerged
as a systemic problem so far. It could have a knock-on impact on real
estate companies (funds drying up leading to defaults) but we think those
will be sporadic incidents and unlikely to cause large-scale defaults.
• Correction an entry opportunity: We see the correction as an entry
opportunity, given that fundamentals remain sound. Private banks have
corrected by 4-12% and PSU banks by 14-18% from market highs. We
think banks should ride the 8-8.25% GDP growth with strong loan
growth and stable ROAs – driving 18-30% growth for the banks. Our top picks are ICICI, Kotak and BOB.
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