High growth, low valuations will help deliver better returns than larger peers.
Last weekend, the government announced plans to pump in around Rs 6,200 crore in the relatively under-capitalised and smaller public sector banks (PSBs) to shore up their capital base. This capital infusion should enable these PSBs to increase their lending by as much as Rs 77,000 crore, thus sustaining robust business growth.
Notably, while credit growth for the industry is expected to pick up and average around 20-22 per cent, say bankers, growth is likely to be higher for smaller banks.
| ESTIMATED 2011-12 EARNINGS | ||||
| In Rs crore | Allahabad Bank | Corporation Bank | IDBI Bank | Dena Bank |
| NII | 4,100 | 3,500 | 2,700 | 1,800 |
| Pre provision profit | 3,800 | 2,900 | 2,500 | 1,300 |
| Net Profit | 2,000 | 1,700 | 1,200 | 750 |
| NIMs (%) | 2.6 | 2.5 | 1.6 | 2.4 |
| CMP (Rs) | 162.0 | 547.0 | 116.5 | 90.5 |
| Book value (Rs) | 190.0 | 560.0 | 170.0 | 115.0 |
| P/BV (FY12x) | 0.85 | 0.98 | 0.69 | 0.81 |
| P/BV (FY11x) | 1.00 | 1.10 | 0.85 | 0.90 |
| NII-Net Interest Income; NIM-Net Interest Margin; Source: Estimates | ||||
J M Garg, Chairman and Managing Director of Corporation Bank, expects its credit growth to be around 30 per cent. With better lending prospects and its branch expansion complete, Bipin Kabra, Chief Financial Officer of Dhanlaxmi Bank, expects it to clock an 80 per cent increase in advances for 2010-11, compared to 50 per cent in the previous year.
Credit growth for the other three banks in this category — Dena, IDBI and Allahabad — is also expected to be well over 25 per cent in the current year.
With a pick-up in economic activity, any pressure on asset quality should also ease. While, margins are expected to hold at current levels, helped by re-pricing of high-cost deposits and banks focusing on low-cost Casa (current/savings account) deposits.
Likewise, the market’s focus is expected to shift from asset quality currently to growth and help reduce the steep valuation gap between bigger and smaller banks say analysts. On a price-to-book value (P/BV) basis, smaller banks are quoting at 0.8-1.1 times their estimated 2010-11 book values or at a 30-35 per cent discount to their slightly bigger PSB peers (average of 1.5 times).
While there are many small banks available cheap, we look at four banks that stand out in terms of better growth rates, margins and valuations, and are expected to deliver earnings growth of 18-20 per cent annually over the next two years. Their stocks, in turn, appear capable of delivering good returns.
Allahabad Bank
The East-focused lender seeks to raise Rs 1,000 crore from the government. The capital infusion could gel with Allahabad Bank’s strategy, as it plans to foray into southern and western regions extensively, to deliver broader business growth. While the bank’s asset quality (NNPA at 0.6 per cent) is at par with its peers, the focus on new markets should diversify credit risk. Besides improving asset quality, the bank observed an improvement in NIMs (hovering around 2.7-2.9 per cent in the past six quarters) to 3 per cent in the March quarter.
Corporation Bank
Backed by strong operational efficiency and high asset quality, Corporation Bank’s earnings grew at an average 30 per cent in the past three years. While its asset quality is expected to remain stable, its net non-performing assets (NNPA) ratio, at 0.3 per cent, is among the best in the industry. This is partly due to the higher lending to low-yielding but less risky large companies. However, the same along with a lower share of CASA deposits ratio (at 30 per cent) are among reasons for the banks’ relatively lower net interest margins (NIMs) of 2.3 per cent. Positively, expect the bank to benefit from the introduction of base-rate system. The management expects NIMs to improve to around 2.5 per cent for 2010-11. Its capital adequacy ratio is healthy at 15.4 per cent, which leaves good room to sustain growth in the medium term.
Dena Bank
Dena Bank is soon expected to receive its first tranche of around Rs 600 crore (of Rs 1,300 crore) from the government. With enhanced capital base, the scope to increase the balance sheet and expansion of branches would gather momentum. The bank was able to add 100 branches in the past five years. However, in the next two years, the bank is expected to add 200 branches, taking the tally to 1,400. The comforting factor is its stable asset quality; the industry’s average gross NPAs increased by 20 per cent, while Dena’s inched up by only 3-4 per cent in 2009-10.
IDBI Bank
Its capital adequacy stands at 11.3 per cent and is marginally below the regulator’s comfort level of 12 per cent. The infusion of Rs 3,000 crore by the government is positive and would ensure the bank is not starved of capital when growth momentum kicks in. After infusion, the government’s stake is estimated to reach around 65 per cent and will allow the bank to come out with a follow-on offer. On the business front, the management expects advances to continue growing at a faster pace than the industry average and is targeting 25-30 per cent for 2010-11. In the long run, expect the bank’s exposure in the life insurance and asset management businesses to create value.
