First round of valuation derating seems to be largely over, but the critical question is whether another round would happen.
Banking stocks, which had been the favourite bear fodder for the past few weeks, were key drivers of Monday’s rally, as the Bank Nifty gained around 4.3 per cent. State Bank of India rose three per cent, while rivals ICICI Bank and HDFC Bank were up 4.7 per cent and 3.9 per cent, respectively, raising hopes that the worst may be over for the lenders.
Is this the beginning of good times or just an interim relief? It may be too early to call it a U-turn, as some analysts feel the sector has seen a valuation derating due to some medium-term factors that will take more than a couple of sunny days to reverse. Two key concerns have led to the derating — moderation of credit growth and quality of assets.
High interest rates and slowing economic growth has created fears that credit offtake, especially in retail and working capital loans segments, will slow further. Even RBI’s estimates of an 18 per cent credit growth for 2011-12 is seen as ambitious. An earnings downgrades for 2012-13 has already begun, as interest rates are likely to stay firm for the next two quarters. India Infoline analysts estimate downgrades between three and 10 per cent.
The gloomy macroeconomic factors will also have an impact on the asset quality, with public sector banks looking more vulnerable than their private sector cousins. Some analysts even wonder if there is another round of derating round the corner. “With respect to credit offtake, the main risk is modest growth in 2012-13, due to prolonged slowdown. Though the first round of valuation derating seems to be largely over with prices having adjusted to extant fundamentals, the critical question is whether another round would happen. We think it is possible,” IIFL analyst Rajiv Mehta said in a report. Mehta has advised clients to stick to safe havens like ICICI Bank and HDFC Bank.
A second de-rating may play out if the interest rate scenario deteriorates further. RBI’s policy stand in September will be watched keenly. Global events and the interest of foreign investors will also be key factors in determining the valuations. Monday’s rally was attributed to US Federal Reserve Chairman Ben Bernanke’s ‘action’ of keeping his options open. If you are already into banks, that is something to bank on.
| BANK VALUATION UNIVERSE | |||||||
| Target Price (Rs) | Adj BV (Rs) | Price/Adj BV (x) | RoA (%) | ||||
| FY12E | FY13E | FY12E | FY13E | FY12E | FY13E | ||
| SBI | 2,198 | 1,090.3 | 1,218.2 | 1.7 | 1.5 | 1.0 | 1.0 |
| PNB | 1,052 | 672.3 | 801.7 | 1.4 | 1.1 | 1.1 | 1.2 |
| BOI | 325 | 280.5 | 328.6 | 1.1 | 0.9 | 0.7 | 0.8 |
| Private Banks | |||||||
| ICICI Bank | 1,136 | 486.4 | 522.3 | 1.7 | 1.6 | 1.4 | 1.4 |
| HDFC Bank | 556 | 123.5 | 141.9 | 3.6 | 3.1 | 1.6 | 1.6 |
| Axis Bank | 1,244 | 509.7 | 597.9 | 2.0 | 1.7 | 1.5 | 1.6 |
| Source: India Infoline Research | |||||||
