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The banking sector has borne the brunt of the weakening macroeconomic scenario, as asset quality turned poor, exerting pressure on profit margins. Stocks have fallen in line with the bank Nifty eroding 4.2 per cent since the beginning of the year.
“Till the broad economic scenario does not turn around, the pressure on the asset quality of these banks will continue. There is no point in running after cheap valuations,” said Kaushik Dani, head of equity at Peerless Mutual Fund. “It’s a ‘layman’ view that if stocks are cheap it’s time to buy them. If a stock is cheap, then it just means that there are inherent problems with the company.”
Among the entire gamut of banking stocks, public sector bank (PSB) stocks are the ones affected the most. Close to 30 banks are trading below their book values, of which about two dozen are PSBs.
The book value of a banking stock indicates the inherent value of the company after adjusting for the liabilities on the banks’ books. The PSBs are trading closer to book value, compared with 0.5 times the price to book value on a reported basis.
“Public sector banks are good buys only with a perspective of two years and above, because there is more pain in store for them. Even large private banks will not be insulated from the economic slowdown. But I am optimistic about smaller private sector banks because of cheap valuations,” said Amit Jain, banking analyst, Sunidhi Financial Services.
Analysts said barring a few private names such as HDFC Bank, ICICI Bank and Kotak Mahindra Bank, cheap valuations have not made stocks of this sector any more attractive at current valuations. Further earnings downgrades would continue to haunt stocks of this sector, as the going will only get tougher for banks for at least the next two to three quarters.
“Despite the banking sector stocks having collapsed year-to-date, we still believe there is no reason to add positions at current levels. We believe earnings downgrades for the sector will continue and there are no near term catalysts. As a result, stocks can continue to trade well below their fair value,” said a report on the sector by Macquarie Equities research, titled ‘Bear with me’.
Analysts expect the stocks are likely to get downgraded further on the back of poor loan growth, tighter liquidity, lending rate cut and high credit costs.
“Credit costs are expected to remain high due to higher stress asset formation, aging of non-performing loans and increased provisioning requirement on restructured assets. Our earnings estimates are 30-50 per cent below consensus for PSBs and 5-10 per cent below consensus for private sector banks,” said the report, authored by analysts Suresh Ganapathy and Parag Jariwala.
