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Whenever there is an
economic recovery, the
banking sector does well,
especially in the early part
of the cycle.
LALIT NAMBIAR
FUND MANAGER AND HEAD-RESEARCH, UTI AMC
HDFC Bank
Axis Bank
MAR-2012 MAR- 2013 MAR- 2014
all these measures, says Chanani, the NPA
risk will reduce significantly in the next one
year or so.
The improvement in equity market senti-
ment will also help companies deal with
their debt problems. Says Sreesanker: We
are going to see a large amount of equity issu-
ance in the form of QIPs (qualified institu-
tional placements) and other instruments.
Capex programs of many companies are
stuck midway due to shortage of funds. If
these players are able to raise equity capital,
complete their projects, and start earning
cash flows from them, they will be able to
pay back their bank loans, says Sreesanker.
Nambiar of UTI Mutual Fund is of the view
that while additions to NPAs may not be as
high as in 2013-14, they will continue to be
created in the first half of 2014-15. In the sec-
ond half, fresh additions may not occur and
the overall NPA level may begin to decline.
Some analysts, however, believe that the
problem is deep-rooted and will take time to
get resolved. Saday Sinha, banking analyst,
Kotak Securities cites the example of the
power sector where many independent
power producers (IPPs) are running at below
optimum capacity because of lack of coal
supplies. If coal supply to these power pro-
ducers is ensured, they may not give rise to
much distressed assets, he says. The gov-
ernment will also have to allow state electric-
ity boards to charge more from end-users so
that they are able to pay the IPPs, especially
if the latter produce electricity by using im-
ported coal, which is more expensive. That
may be a difficult decision for many state
governments to take. Many infrastructure
projects such as roads are stuck as their pro-
moters had bid aggressively. As interest rates
rose and high traffic projections failed to ma-
terialise, these projects turned unviable. Due
to such structural issues in many of the sec-
tors to which banks have lent, Sinha believes
that the the NPA problem may not disappear
soon.
Paucity of capital: As the economy revives
and credit growth picks up, banks will need
more funds to fuel their growth. More capital
COMPANY CMP (`)
EPS-5 YR
CAGR (%)
ROA-3 YR AVG
(%)
ROE-3 YR AVG
(%)
NET NPA/ADVANCES
(%)-2013-14
CASA (%) P/BV
P/BV-5-YR
AVG.
Yes Bank Ltd. 562 34.4 1.51 24.3 0.05 22.03 2.23 2.72
HDFC Bank Ltd. 837.20 28.08 1.82 20.41 0.27 44.81 4.55 4.17
IndusInd Bank Ltd. 573 45.01 1.64 18.21 0.33 32.55 3.48 3
City Union Bank Ltd. 75.85 24.05 1.63 23.57 0.63 16.77 2.02 1.61
The Jammu & Kashmir
Bank Ltd.
1,594.90 23.99 1.46 21.24 0.14 39.23 1.32 1.15
Axis Bank Ltd. 1,924.90 21.61 1.67 18.89 0.44 45.01 2.37 2.34
Karur Vysya Bank Ltd. 481.35 18.55 1.5 20.69 0.37 19.25 1.5 1.59
The South Indian Bank Ltd. 32.05 16.99 1.06 19.6 0.78 20.69 1.32 1.24
PERFORMERS YOU MAY CHOOSE FROM
MANY PRIVATE SECTOR BANKS HAVE SHOWN ROBUST GROWTH IN EARNINGS, MAINTAINED HIGH RETURN RATIOS, AND
LOW LEVELS OF NPA DESPITE THE ECONOMIC SLOWDOWN.
STEADY GROWTH IN BOTTOMLINE
THE EPS (EARNINGS PER SHARE) OF BOTH BANKS HAS GROWN STEADILY IN THE
PAST THREE YEARS DESPITE THE SLOWDOWN.
All data source: Ace Equity, as on 3 July, 2014. Private bank stocks are ranked above by giving 40% weight to EPS growth (rank), 20% each to RoA and RoE (rank), and 20% to NPA (rank).
`22.36
`28.87
`114.27
`36.45
`134.3
will also be needed to comply with Basel III
norms. Public-sector banks in particular
need massive capital injection, with esti-
mates ranging from `90,000-1,30,000
crore. If they dont receive capital, they will
not be able to participate in the next phase of
growth.
Private or PSU banks?
Before you invest, you need to first decide
where you are going to put your money.
Nambiar favours private-sector banks. Pri-
vate banks provide higher comfort. Over the
long term they will add more value to your
portfolio, as opposed to, say, second-tier
PSU banks, he says. Private banks do in-
deed have better fundamentals, like earn-
ings growth and asset quality (see table be-
low). However, they come at premium valua-
tions. One way you can reduce the risk of
investing in these expensive stocks is by hav-
ing an investment horizon of 3-5 years.
Chanani of Sundaram Mutual makes a case
for investing in public-sector banks. Just as
PSU banks have suffered more because of de-
teriorating asset quality, we expect them to
benefit more on an upturn, he says. He adds
two caveats: these banks must receive capital
and they shouldnt turn too defensive be-
cause of the scars of the past. Nambiar adds
that if the recommendations of the P J Nayak
committeewhich has recommended lower-
ing of government stake in PSU banks and
stake transfer to a holding companyare im-
plemented, that will be positive for PSU bank
stocks.
Sinha of Kotak Securities warns that PSU
banks have to implement wage revisions,
which will affect their bottomlines. He adds:
While the market expects a rally in PSU
banks based on improvement in asset quali-
ty, I believe the resolution of this issue may
take some time.
Valuations up
The CNX Nifty has run up 34.57% year-to-
date compared to the Niftys rise of 21.11%.
Hence banking stocks have turned expen-
sive. However, if the expected economic up-
turn comes about, current valuations may
not appear too high. Says Chanani of Sunda-
ram Mutual: There is still significant upside
left in banking. There is scope for positive
surprises, as is often the case during inflec-
tion points, which provides a margin of safe-
ty. Next, let us turn to two stocks that you
may invest in.
HDFC Bank: HDFC Bank has the highest
market cap of `2,02,077.95 crore among pri-
vate-sector banks. Its net interest margin
(NIM) stood at a healthy 4.02% at the end of
March 2014, the third-highest among private
banks. It has a CASA (current account-sav-
ings account ratio, a measure of a banks abil-
ity to garner low-cost retail deposits) ratio of
44.81%, second only to Axis Banks. A high
portion of its loan portfolio consists of se-
cured retail loans. Its net NPA to net advanc-
es stood at a miniscule 0.27% at the end of
March 2014. At 28.08% compounded annual-
ly, the bank has reported high earnings
growth over the past five financial years. Its
rapid growth is expected to sustain in the fu-
ture as well. The banks valuation is expen-
sive (see: Performers you may choose from).
Buy on corrections and hold for five years to
lower risk arising from high price.
Axis Bank: It is Indias third largest private
sector bank by market cap (`90,831.65
crore). It has a CASA ratio of 45.01%, the
highest among private-sector banks. Its asset
quality is high: its net NPA to net advances
stood at only 0.44% at the end of March 2014.
At 21.61% compounded annually, the bank
has shown above average EPS growth. It en-
joyed above industry average return on equi-
ty (RoE) of 17.63% in financial year 2014. Its
current price to book value (P/BV) of 2.37 is
only marginally above its five-year average of
2.34. Buy with at least a three-year horizon.
`102.12
Even though banking
stocks have run up, there is
scope for positive surprises,
as is often the case during
inflection points. Hence
there is margin of safety.
SHIV CHANANI
FUND MANAGER-EQUITY,
SUNDARAM MUTUAL FUND
The Economic Times Wealth, July 7-13, 2014
11
Stocks