Banks: It never rains, it pours

Possible losses from derivatives, retail loans and slower credit growth worry investors.

The BSE Bankex lost 9 per cent on Monday with ICICI Bank crashing nearly 14 per cent and State Bank of India (SBI) falling 4.7 per cent. ICICI Bank fell to a 52-week low in intra-day trades as investors discovered that the bank's life insurance subsidiary would be turning in far lower margins than expected because of a change in the way in which costs will now be recognised.

As against an expectation of a margin of around 19-20 per cent, the insurance subsidiary's margins are now expected to be in low double digits. This has been the second bit of negative news after the bank announced $263 million worth of m-t-m provisions for its overseas exposure of $6 billion.

In spite of the clarification on the farm loan waiver, by which banks will get cash over the next three years, bank stocks continue to be hammered.

Apart from the worries on forex derivatives and an increase in non-performing retail loans, the other reason why the street appears to be disenchanted with banking stocks is the imminent slowdown in the economy, which could lower the momentum in credit growth.

Already, retail loan growth is expected to decelerate to an estimated 16 per cent for the quarter ended March 2008, compared with an average of 50.1 per cent between FY2004-06, according to a report by brokerage Morgan Stanley.

The reluctance on the part of banks to giving consumer loans is partly responsible for the slowdown in overall credit which has moderated to 21.8 per cent in mid-February from 27.6 at the end of March and 29.3 per cent as at the end of February 2007.

Analysts believe that unless lending rates are reduced credit growth could fall further, perhaps even below 20 per cent. However, given that companies are not able to access resources from the overseas markets, as easily and cheaply as they were a year back, banks will have enough opportunities to lend to the corporate sector.

At Rs 757, ICICI Bank trades at less than 1.5 times FY09 price to book, SBI at Rs 1633 trades at under 2 times and HDFC Bank at Rs 1239 trades at just over 3 times.

Jaiprakash Associates : Losing ground

Cement , power and construction player Jaiprakash Associates, now part of the BSE Sensex , crashed 12 per cent on Monday to Rs 208. A strong outperformer over the past one year, gaining 87 per cent compared with an 18 per cent rise in the Sensex, the stock has lost 50 per cent since the start of 2008. The stock was one of the biggest holdings of clients of the intermediary Bear Sterns.

The company' s performance in the first nine months of FY08 has been rather ordinary with the operating profit up just 5 per cent at Rs 699 crore on a revenue growth of just under 5 per cent at Rs 2,705 crore. Sales of cement, which bring in more than 50 per cent of revenues, rose 11 per cent.

The company's main markets are Rajastha, Madhya Pradesh and Uttar Pradesh. However, the construction business saw a fall in revenues. Jaiprakash is setting up hydro power projects and as of March 2007, it had 700 mw of operating assets in the hydropower sector through subsidiaries.

The stock had been valued at Rs 400 on a sum-of-parts basis, some time back. Analysts believed the company might divest a portion of its subsidiary Jaypee Infratech to venture capitalists, which would create value.

Jaypee Infratech is implementing the 1000 km-long Ganga expressway, connecting Greater Noida to Ballia in UP, on a BOT basis. The project will require an investment of over Rs 6,000 crore but is expected to give the company a land bank of over 6,000 acres along the expressway.

Besides, analysts are also factoring in some upside from a future listing of its hydro power subsidiary JP Power.The stock trades at 29.7 times estimated FY 09 earnings and should be a market performer.