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S l i p p a g e s t o t r e n d n o r t h : t e s t i n g t i m e s a h e a d …
The plot has thickened for banks that have faced the brunt of the RBI
increasing its policy rates 12 times since March 2010. Even though the RBI
is hawkish and is willing to sacrifice economic growth to anchor
inflationary pressures, banks have endured enough. Credit growth in the
year to date has remained muted at 3.4% and continued slowdown for the
next two quarters may impact expected credit growth of 18%. Margins
have taken a hit and as the pain period gets prolonged we see asset
concerns pressurising book value, thus depressing valuations even further.
The sector is in the doldrums with the Bank Nifty correcting ~20% with
certain stocks correcting by 40-50% since January 2011.
We believe banks, especially public sector banks (PSBs) with high
exposure of 20-25% to infra (40% CAGR over FY09-11), power (47% CAGR
over FY09-11), textiles, SMEs, etc. may face higher slippages. Moreover,
banks with larger restructured portfolios like PNB (6.5%) IOB (5.7%), etc.
could suffer incremental delinquencies from the same. Private sector
banks are relatively better off with lower infra exposures of 10-15% of loan
book. Since the risky exposure is primarily to corporate sector unlike the
spike in retail NPA seen in FY09, we prefer private banks over PSBs.
We have downgraded the target multiples for majority of coverage banks
by 15-20% in light of declining profit estimates, RoEs or rising NPA
concerns as their exposures to risky sectors remain high. Valuation P/ABV
multiples may stay at lower levels for an elongated period as corporate
recovery may take longer than the previous cycle implying bank stocks
could be subdued for a longer time.
We are neutral on public sector banks and overweight on private sector
banks. We continue to recommend large retail franchise and stable asset
quality banks like HDFC Bank in the private space. Among PSBs, we like
Bank of Baroda with stable asset quality, margins and growth visibility.
A risk to our call would a reversal of the interest rate cycle if it commences
in the near future or is faster than anticipated.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
S l i p p a g e s t o t r e n d n o r t h : t e s t i n g t i m e s a h e a d …
The plot has thickened for banks that have faced the brunt of the RBI
increasing its policy rates 12 times since March 2010. Even though the RBI
is hawkish and is willing to sacrifice economic growth to anchor
inflationary pressures, banks have endured enough. Credit growth in the
year to date has remained muted at 3.4% and continued slowdown for the
next two quarters may impact expected credit growth of 18%. Margins
have taken a hit and as the pain period gets prolonged we see asset
concerns pressurising book value, thus depressing valuations even further.
The sector is in the doldrums with the Bank Nifty correcting ~20% with
certain stocks correcting by 40-50% since January 2011.
We believe banks, especially public sector banks (PSBs) with high
exposure of 20-25% to infra (40% CAGR over FY09-11), power (47% CAGR
over FY09-11), textiles, SMEs, etc. may face higher slippages. Moreover,
banks with larger restructured portfolios like PNB (6.5%) IOB (5.7%), etc.
could suffer incremental delinquencies from the same. Private sector
banks are relatively better off with lower infra exposures of 10-15% of loan
book. Since the risky exposure is primarily to corporate sector unlike the
spike in retail NPA seen in FY09, we prefer private banks over PSBs.
We have downgraded the target multiples for majority of coverage banks
by 15-20% in light of declining profit estimates, RoEs or rising NPA
concerns as their exposures to risky sectors remain high. Valuation P/ABV
multiples may stay at lower levels for an elongated period as corporate
recovery may take longer than the previous cycle implying bank stocks
could be subdued for a longer time.
We are neutral on public sector banks and overweight on private sector
banks. We continue to recommend large retail franchise and stable asset
quality banks like HDFC Bank in the private space. Among PSBs, we like
Bank of Baroda with stable asset quality, margins and growth visibility.
A risk to our call would a reversal of the interest rate cycle if it commences
in the near future or is faster than anticipated.
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