Indian bank stocks have been hammered mercilessly since January this year and most of them are now trading at 2008 lows. The interest rate scenario remains hawkish with a clear northward bias and hence bearish view on the bank stocks would continue to prevail over this period. So why should one then look at banking stocks for investments?
The answer to above question lies in answer to below mentioned question...
THE MILLION $ QUESTION - "How much of the higher interest scenario, loan book slowdown and pessimism has already been factored into prices?"
If you ask me almost 85-90% has already been factored into the prices. And thats one of the main reasons that the stocks actually bounced back on Wednesday (the day after announcement of CRR and Repo rate hike).
There is nothing risk-free in the markets. So it would be foolish to assume that banking stocks will not go down if the market goes down. What one should look at is optimizing risk-return rewards i.e. taking lower risk of downside vis-a-vis upside potential. And the risk return reward is currently hugely in favor of the banks. Why am I saying so?
The reason why i am saying that concerns and risks are priced in banking stocks and you have better risk-return reward is that they are going very cheap on valuations vis-a-vis growth prospectus.
Despite of higher interest scenario, though not at 8-9% India's GDP will still continue to grow at 7% which is good enough to grow loan demand at 15-20%+ for PSU and private banks respectively. Deposit growth continues to be robust at 20% plus and with current stock market condition would probably improve further as lot of people are preferring to go on cash. Most of the private sector banks have got down duration (a measure of sensitivity of debt/g-sec investment portfolio to interest rate movements) to close to 1-2. This will result much lower MTM (mark-to-market) losses on their investment portfolio this time. On a whole there would not be much slippages in NIMs (Net Interest Margins), lower MTM losses and lower NPA (non-performing assets) provisions than what market has already built in the prices.
Look at FY09 P/B valuation table below to realise how badly these stocks have been battered...
Axis Banks 2.4x
BoB 0.8x
BoI 1.7x
Canara 0.9x
HDFC Bank 2.4x
Kotak Bank 1.6x
SBI 1.6x
UBI 0.9x
ICICI Bank 1.2x
PNB 1.2x
IDBI 0.8x
OBC 0.6x
* Kotak bank and ICICI Bank's valaution are for core business after adjusting for other businesses like life insurance, asset management, broking etc.
These valautions as I said above are for current year i.e. FY09 and abysmally low....classic expample of iirational exuberance and therefore provide a great opportunity for GARP investor - an investor seeking growth at resonable price (price means valuaion).
But dont buy anything and everything. I will suggest a basket approach with banks with higher RoEs and higher growth.
So make a basket of the following banking stocks -
1. HDFC Bank - 20-30% growth 18-20% RoE (concerns on CBoP merger priced in)
2. Axis Bank - 30% growth 20%+ RoE (great franchisee...concerns on retirement of P.J.Nayak priced in)
3. Kotak Mahindra Bank - too cheap and best acquisition candidate alongwith Yes Bank in 2009, high equity market exposure already price in at 1.6x P/B for a ripe pvt sector bank
4. Bank of India - 20-30% growth, 20%+ RoE, only PSU bank showing clear signs of breaking berucratic shackles and becoming one like a pvt sector bank....will regain higher re-rating.
I will keep other PSUs and ICICI bank out (though ICICI Bank is really tempting me on valuations) for their poor growth and RoEs (ICICI Bank RoE is a low 12%).
So value investor go ahead and invest in banking stock with the above basket approach.
Keep watching this space for detailed valuation on these banks
