Banks stocks ride takeover buzz, credit surge

Bank stocks surge an average 6.37% against 2.17% rise in the Sensex

Over the last two weeks bank stocks have surged an average 6.37 per cent against a 2.17 per cent rise in the Sensex. The rally has been led by Karnataka Bank, which gained 30.37 per cent, J&K Bank (26.13 per cent), Federal Bank (19.64 per cent), Corporation Bank (16.71 per cent) and HDFC Bank (12.48 per cent) among others.

Some banks, however, remained on the losing side despite the strong upward momentum. Bank of Punjab, Centurion Bank and the State Bank of Tranvancore ended with losses over the past couple of weeks.

"Bank counters have witnessed rigorous buying," said Pradip C Doshi, chief executive officer of Pradip C Doshi Stock Brokers.

"Investors are awaiting a lot of changes in the sector and there is optimism in the air. Rumours about Reliance looking for appropriate acquisitions in the banking sectors have also added to the demand for bank shares," he added.

While analysts expect banks to turn in disappointing numbers in the first quarter, owning to mark-to-market losses and lack of trading profits, they have been recommending a 'buy', citing the potentially strong rebound in the ensuing quarters.

With fund managers going bottom-fishing and speculators indulging heavily on rumours of Reliance Capital scouting for a private bank to catapult its financial services business, a fresh wave of opportunistic buying has been triggered, brokers said.

Explaining the exuberance in bank stocks despite the gloomy near-term prospects, Dhiraj Sachdev, portfolio manager, ASK RJ Wealth Management and Portfolio Services, said: "The massive expansion in the corporate sector coupled with the growth in retail loans has induced strong credit growth. Moreover, the sector is expected to be at the helm of activities in the next two to three years." He believes that most banks are still trading at decent valuations.

Owing to volatility in the debt market, the 10-year benchmark yield ended the quarter 22 basis points higher at 6.68 per cent. This, analysts, say, would have an adverse impact on banks' June-quarter numbers as their bond portfolio and trading income could have been impacted.

However, with the expansion in many industries, banks have been witnessing a very strong credit offtake. Over the last quarter, bank credit growth has been 30 per cent (excluding IDBI) while deposit growth has been 15 per cent (y-o-y). Bank stocks are trading at price-adjusted book value ranging between 1.2 and 1.8 times, which is still not very expensive, considering the strong investment demand, said analysts.

"The banking sector was slow to respond to the overall bull market. Private banks are leading the sector, with public banks trailing behind," said an analyst with a domestic broking firm.

Almost all listed banks had strong go this month, barring a select few. Bank of Punjab and Centurion Bank had seen a run up on news that the two were merging. Once the swap ratio was announced, it was time for a breather.

The top two gainers - Karnataka Bank and J&K Bank - have caught the fancy of analysts recently. According to Motilal Oswal Securities, "During FY05, Karnataka Bank saw structural changes in its earnings profile with strong improvement in margins, net interest income and the loan book. Even net NPAs declined sharply."

The firm recommended a buy at Rs 87 (June 30, 2005), citing steady growth and attractive valuations. Similarly, Angel Broking recommended J&K Bank as its top pick at Rs 369 with a price target of Rs 500. The new management and conducive macro-economic environment in Jammu and Kashmir will facilitate growth, the report said.