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Monthly Update: August 2011 – Financials
Slower growth pointing to peaking of interest rates
Rising global growth concerns and declining fiscal stimulus measures in developed
economies (on concerns of expanding fiscal deficits and unsustainable public debt to GDP)
are likely to keep commodity and energy prices in check at least in the short term.
Moreover, with signs of a slowdown on the domestic growth front, evident from slowing
GDP growth rates, tepid IIP growth, moderating trend in PMI, declining vehicle sales and
cement dispatches growth rates, we believe policy rates are close to their peak. Although
recent indications from the RBI suggest another 25bp hike in the repo rate in the upcoming
monetary policy review, we believe the RBI may pause after that hike.
Further rate hikes could increase asset quality risks
Our base case, looking at declining credit growth and improving liquidity, is that lending
and deposit rates have largely peaked. However, further rate hikes by the RBI (post an
expected 25bp hike in the repo rate on 16th September, 2011) could increase asset quality
risks for the whole banking sector. Hence, amongst mid caps we prefer banks with a more
conservative asset-quality profile (i.e., relatively lower yield on advances, lower infra
exposure and switchover to system-based recognition system nearly complete).
Switch strategy – HDFC Bank to Axis Bank
HDFC Bank’s fundamentals and earnings outlook remain strong, but at 3.1x FY2013E
ABV, we believe the stock is fairly valued. Axis Bank is trading at attractive valuations of
1.7x FY2013E ABV – almost at 46% discount to HDFC Bank vs. an average discount of
32% since July 2006. While the bank’s ALM position vis-à-vis HDFC Bank is currently a
disadvantage, however with the interest rate cycle close to peak, in our view the bank will
also benefit more once interest rates cool off a bit in CY2012. We believe such a large
discount for Axis Bank to HDFC Bank is unjustified, considering its similar earnings quality
and profitability. We have valued Axis Bank at 2.5x FY2013E ABV to arrive at a target
price of `1,555.
Switch strategy – UCO Bank to United Bank of India
United Bank of India (UTDBK) is trading at 0.6x FY2013E P/ABV, one of the lowest in the
industry. Considering similar RoAs (0.6% over FY2011–13) for both UTDBK and UCO,
superior CASA deposit franchise for UTDBK and higher relative contraction in NIMs
expected for UCO over FY2011–13, we recommend a switch from UCO (0.8x FY2013
P/ABV) to UTDBK. We value UTDBK at 0.8x FY2013E P/ABV, implying an upside of 30.0%;
hence, we recommend a Buy rating on the stock with a target price of `97.
BOM – Sound fundamentals, attractive valuation – Recommend Buy
We like Bank of Maharashtra (BOM) due to its sustainable and healthy CASA franchise,
improving asset quality, lower exposure to riskier sectors and attractive valuations. Return
ratios are expected to improve on the back of steady risk-adjusted NIMs, reduction in
operating expenses and gradual improvement in fee income. Hence, we recommend Buy
on the stock with a target price of `61
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Monthly Update: August 2011 – Financials
Slower growth pointing to peaking of interest rates
Rising global growth concerns and declining fiscal stimulus measures in developed
economies (on concerns of expanding fiscal deficits and unsustainable public debt to GDP)
are likely to keep commodity and energy prices in check at least in the short term.
Moreover, with signs of a slowdown on the domestic growth front, evident from slowing
GDP growth rates, tepid IIP growth, moderating trend in PMI, declining vehicle sales and
cement dispatches growth rates, we believe policy rates are close to their peak. Although
recent indications from the RBI suggest another 25bp hike in the repo rate in the upcoming
monetary policy review, we believe the RBI may pause after that hike.
Further rate hikes could increase asset quality risks
Our base case, looking at declining credit growth and improving liquidity, is that lending
and deposit rates have largely peaked. However, further rate hikes by the RBI (post an
expected 25bp hike in the repo rate on 16th September, 2011) could increase asset quality
risks for the whole banking sector. Hence, amongst mid caps we prefer banks with a more
conservative asset-quality profile (i.e., relatively lower yield on advances, lower infra
exposure and switchover to system-based recognition system nearly complete).
Switch strategy – HDFC Bank to Axis Bank
HDFC Bank’s fundamentals and earnings outlook remain strong, but at 3.1x FY2013E
ABV, we believe the stock is fairly valued. Axis Bank is trading at attractive valuations of
1.7x FY2013E ABV – almost at 46% discount to HDFC Bank vs. an average discount of
32% since July 2006. While the bank’s ALM position vis-à-vis HDFC Bank is currently a
disadvantage, however with the interest rate cycle close to peak, in our view the bank will
also benefit more once interest rates cool off a bit in CY2012. We believe such a large
discount for Axis Bank to HDFC Bank is unjustified, considering its similar earnings quality
and profitability. We have valued Axis Bank at 2.5x FY2013E ABV to arrive at a target
price of `1,555.
Switch strategy – UCO Bank to United Bank of India
United Bank of India (UTDBK) is trading at 0.6x FY2013E P/ABV, one of the lowest in the
industry. Considering similar RoAs (0.6% over FY2011–13) for both UTDBK and UCO,
superior CASA deposit franchise for UTDBK and higher relative contraction in NIMs
expected for UCO over FY2011–13, we recommend a switch from UCO (0.8x FY2013
P/ABV) to UTDBK. We value UTDBK at 0.8x FY2013E P/ABV, implying an upside of 30.0%;
hence, we recommend a Buy rating on the stock with a target price of `97.
BOM – Sound fundamentals, attractive valuation – Recommend Buy
We like Bank of Maharashtra (BOM) due to its sustainable and healthy CASA franchise,
improving asset quality, lower exposure to riskier sectors and attractive valuations. Return
ratios are expected to improve on the back of steady risk-adjusted NIMs, reduction in
operating expenses and gradual improvement in fee income. Hence, we recommend Buy
on the stock with a target price of `61
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