The recent correction, led by worries over margin pressure and asset quality, has presented an opportunity to selectively buy quality stocks.
The banking sector has been abuzz with negative news driving stocks southwards, especially in the last one week. The BSE Bankex underperformed the Sensex, dropping almost 7 per cent last week (ended December 10) as against a dip of 1.4 per cent by the latter. Fundamentally, while margins in the near term could see some pressure, the operational performance will continue to be robust for the banks. Experts, thus, say the current opportunity could be used to selectively buy quality stocks with a medium to long-term perspective.
Margins may slip marginally
While the last two quarters witnessed strong net interest margins across banks, analysts believe the margins have peaked and could moderately slip in the current quarter consequent to the tight liquidity in the system seen recently. Net interest margin is the difference between the interest earned and the cost of funds. With the advent of a base rate, banks are expected to revisit their lending rates to match up to higher deposit costs. Banks with high CASA (current and savings account) deposits have a natural advantage as their deposit cost may not rise as much as that of some of the banks focused on wholesale funds. Thus, while cost pressures will be inevitable, the impact is likely to be disproportionate across banks and should be visible in the next two quarters. While most banks have hiked their lending rates, thereby limiting the negative impact on their margins, higher-CASA banks like SBI, PNB and Bank of Baroda (BoB) will be impacted relatively less, say analysts.
Credit growth perking up
In the current financial year so far, while banks have achieved 10 per cent loan growth, analysts believe the sector should achieve a credit growth of 20 per cent for 2010-11 owing to a strong GDP growth of 8.5-9 per cent. Interestingly, the credit growth is getting diversified and banks are witnessing early signs of a revival in capital expenditure by India Inc. Working capital demand across industries also remains strong. Thus, concerns on the lack of demand for funds should ease.
Asset quality to improve
Two sectors — telecom and realty — have seen some headwind recently. Consequently, concerns have surfaced regarding the banking sector’s exposure to these sectors. However, the overall exposure to the troubled sectors is small — 2 per cent of loans for telecom and 3 per cent for real estate — which along with reasonable collaterals provides some relief on the asset quality front. Overall slippages could rise sequentially in the December 2010 quarter. Going ahead, PSU banks are expected to benefit from lower slippages and better recoveries in FY12, led by higher economic growth.
The sector’s overall retail asset quality slippages are expected to remain benign, believe analysts, who also expect the credit cost to decline.
| MARCHING AHEAD | ||||||
| Bank | Price (Rs) | P/BV FY11E (x) | CASA (%) |
Net Interest Margin (%) | ||
| FY10 | FY11E | FY12E | ||||
| SBI | 2,747 | 1.90 | 47.80 | 2.50 | 2.90 | 2.80 |
| Bank of Baroda | 883 | 1.90 | 35.90 | 2.40 | 2.70 | 2.60 |
| PNB | 1,226 | 2.00 | 40.90 | 3.30 | 3.70 | 3.60 |
| Union Bank | 331 | 1.60 | 32.70 | 2.40 | 2.90 | 2.80 |
| Bank of India | 444 | 1.60 | 28.20 | 2.40 | 2.60 | 2.50 |
| Canara Bank | 663 | 1.90 | 28.90 | 2.40 | 2.80 | 2.70 |
| Federal Bank | 417 | 1.40 | 29.40 | 3.50 | 3.90 | 3.80 |
| Axis Bank | 1,324 | 2.90 | 41.50 | 3.10 | 3.40 | 3.30 |
| HDFC Bank | 2,241 | 4.10 | 50.60 | 4.30 | 4.30 | 4.20 |
| ICICI Bank | 1,119 | 2.40 | 44.00 | 2.40 | 2.60 | 2.90 |
| E: Estimates; P/BV: Price to book value; CASA as a share of total deposits as on end of September 2010 quarter Source: Company, Bloomberg, Kotak Securities | ||||||
Recapitalisation to dilute ROEs
The government has proposed to infuse funds (recapitalise) worth Rs 9,700 crore in nine PSU banks to maintain higher capital adequacy. This move will push up the government holding in each of these banks to around 58 per cent. Meanwhile, SBI too is planning a rights offer worth Rs 20,000 crore. While these moves will shore up the capital base of these banks, including SBI, and enable them to fund future growth, their ROEs (return on equity) could slip marginally due to the dilution in equity.
However, the fresh funds could provide some support to the margins and lead to an increase in the book value of these banks, say analysts. The highest increase in book value will be for Bank of Baroda (over 7 per cent), followed by Union Bank of India (over 3 per cent).
Stock performance
As the stock markets have captured most of the near-term headwind, experts believe downsides from the current levels will be limited. They say while PSU banks are now trading at reasonable valuations of 1-1.7 times the 2011-12 estimated book value, private banks should deliver good returns because of stronger growth.
Analysts estimate the banking sector earnings to post a 27 per cent CAGR over FY10-12, with the private banks expected to grow faster (31 per cent). The recovery in credit growth coupled with relatively steady margins should drive the sector’s net interest income (NII) growth by over 25 per cent during FY10-12.
Meanwhile, the sector awaits clarity over the amortisation of the pension option liabilities and gratuity cost. If RBI allows banks to amortise the cost over a span of five years, the impact could be restricted.
While the December quarter results will be the key driving force for bank stocks in the near term, most brokerages are positive on the sector with SBI, PNB, BoB, ICICI Bank and HDFC Bank as their top picks.
