Sector Specific - Banking Sector
Banking Stocks (updated - 23 June 2009)
Between May and now the BSE Bankex has run up more than 32 per cent while the Sensex has gained around 18 per cent. Indeed banks seems to have enjoyed more than their fair share of gains ever since the mood in the market changed.
But even after adjusting for lower market risk and higher earnings, valuations seem somewhat stretched— in recent weeks nearly all banks have been trading higher than their historical average valuations. While the worst may be over for the economy in terms of a liquidity crisis or even weak credit growth, and while little should go wrong in the next couple of years, there are a worries on a couple of fronts.
As Deutsche Bank points out, the outlook for benchmark interest rates---generally a powerful short-term driver of banks’ valuations---is no longer benign due to large government borrowings and rising inflationary expectations. A high fiscal deficit and consequently larger borrowings and higher interest rates could, therefore, stymie loan growth. Credit is currently expected to grow at around 16-18 per cent in the current year and perhaps by a slightly higher 19-20 per cent next year if the economy revives.
There are also some bank stocks which seem undervalued. From March ‘05 to July’07, Axis Bank traded at a P/E of 20-25 when net profit growth was 20-50%. Now the stock is trading at a P/E of 14, with net profit growth of 69% in FY 2009. The inference is that stock markets have not been giving it the premium it deserves to reflect the faster rate of growth.
A few public sector banks, too, appear to have inherent value. Punjab National Bank (PNB) traded at a P/E of 10-13 when its growth was 10-30% between March 9, 2005 and July 26, 2007. Today, the stock trades at a P/E of 6.3. However, its net profit grew by 51% in FY 2009. Valuations have come down but the growth has gone up, making it an even cheaper stock.
Just like PNB, Bank of Baroda and Bank of India also seem to be compelling buys as their current valuations have not taken into account their faster pace of growth. If we were still in the secular bull run that we witnessed earlier, prices might have gone up even more sharply as the market discounts fundamentals much more easily.
Among other banks, Indian Bank and Corporation Bank are also good picks.
HDFC Bank’s valuations have remained in the range of 25-30 and it has grown by 30%-40% historically. Now its P/E is at 29 and profit growth was 41% in FY 2009. This means that the stock is as attractive as it was. What is important for investors is that such stability often results in the stock becoming a market performer. Therefore, it is unlikely that HDFC Bank will outperform the market.
source - ET
The stock is now trading at a P/E of 23 and profits have declined by 10% in FY 2009. This throws up an interesting outcome: the stock is trading at pretty much the same valuation as it was in those “good old days.” But the tide has turned now and it is one of the most affected banks due to the slowdown, which means that it is over-valued at current prices.
For many other banks, valuations are still low, but growth too has been affected. Applying the same yardstick that we did for ICICI Bank, we found that Indian Overseas Bank (IOB) had a P/E multiple of between 7 and 9 at the five critical points between March 9, 2005 and July 26, 2007 while its profit growth was in the range of 20-30%.
Now the bank’s P/E is 3.6, but net profit growth was just 10% in FY 2009, making it one of the slowest-growing banks in India. Valuations have come down, and so has growth in earnings. Therefore, it should not be construed as a cheap stock as the fall in growth warrants a decline in valuation. The same is the case with Allahabad Bank, Oriental Bank of Commerce and Karnataka Bank.
While this is an increase, it’s not enough to justify the expansion in banks’ multiples---the increase high-yielding consumer assets will be moderate and also with better access to capital markets companies will be able to made do with moderated amounts from banks. Certainly a credit off take of 25 per cent or thereabouts don’t seem likely in the near future.
Moreover, net interest margins will remain weak since banks have been lending at lower rates ahead of cuts in deposit rates and the benefit of lower borrowing rates will come in with alag. Most important, nonperforming loans (npls) will rise ---the recent restructuring numbers put out by State Bank of India (SBI) were higher than expected at close to 4 per cent of the loan book if pending applications are considered. In short as Citigroup says, there is a reasonably favourable banking market in place but the step up is only moderate relative to where it was a quarter ago and is not as dramatic as the market would suggest.
source - BS
Banking Sector (updated - 15 June 2009)
While many bank stocks appear to be over-valued, Axis Bank, Punjab National Bank and few other state-owned banks seem to be good bets for long-term investors
THE ongoing stock market rally which lifted the benchmark Nifty index of the NSE by 78% since March 09, has sent banking shares soaring by even higher margins. But this doesn’t make all banking stocks expensive at current levels.
A close look reveals that Axis Bank, Punjab National Bank, Bank of Baroda and Bank of India are still very good buys for long-term investors if growth and historical valuations are taken into account.
There have been over a dozen times when the markets have taken a decisive turn up or down since the bull run began in 2003. ETIG analysed the valuations of banks at these points because market dynamics often change with every substantial gain or fall. We also considered banks’ growth trajectory at these points as growth determines valuations.
The most interesting case is of ICICI Bank. Its stock traded at price to earnings (P/E) multiple of between 15 and 30 on five important dates from March 9, 2005 to July 26, 2007. That was when the only way market headed was upwards. The growth in earnings during this period ranged from 20-30%.
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