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Banking stocks under pressure?

Tuesday, December 21, 2010
By Manik K. Malakar

The general feeling that corruption is now seeping into the Banking Sector in India has begun taking its toll on the Bank stocks that are a part of the broader markets. In the recent past there have been disclosures that some banks have allegedly been involved in some questionable activities.  “Banking stocks corrected across the board on the PSU banks ‘bribery for Loans’ scam, 2G and MFI loans, liquidity concerns and rising G-Sec yields,” reveal analysts Kajal Gandhi, Viraj Gandhi and Mani Arora of ICICI Securities. Other sources concurred with this assessment. “Definitely and positively,” agreed Chandresh Shah a senior market analyst.

Parikshit Joshi, a veteran media-person was even more scathing in his assessment. “The entire country seems to be in the throes of scams-ranging from 2-G spectrum allocation, Commonwealth Games and the recent bribe-for-loan scandal hitting some banks to name a few,” Joshi said.

What are the downstream effects, as of now? ICICI Securities, expects a reduction in valuation multiples of PSU banks, particularly those of mid-cap PSU banks. Their range of 1.5x-2x may shift to 1.4-1.8x.

This valuation overhang for banks is confirmed by investor sentiment. “They are concerned about what the NPA (Non Performing Assets) of the sector will be,” said Shah. What really cuts to the quick is the lack of confidence of investors in the sector. “This is a sector that people used to bank on, but now there is a crisis of confidence in it,” Shah continued.

And there are other factors that will affect the sector too, going forward. “We have seen interest rates on the deposits side, money markets, etc. inching up at a much faster pace on account of continued liquidity shortfall,” said the ICICI Securities analysts. Banks have borrowed approximately Rs. One lakh crore from the RBI under the LAF (Liquidity Adjustment Facility) section. Also advance tax outflow that may have been in the vicinity of Rs. 4,000 to Rs. 5,000 crore will all contribute to put pressure on the sector.

Credit growth in the industry has been at 22.6 per cent and this surpasses deposit growth at 14 per cent (figures as of November 26, 2010) and this has led to a C/D (Credit/Deposit) ratio increasing from 73 per cent to 74 per cent. 

Besides financial issues a slew of political and legal issues will hang over the sector too in the near term. “The announcement by the CBI and other authorities on the damage to the sector or alternatively a limit of charges will announce the limit of the damage. People don’t know how much banks stand to lose and this is acting as a damper on sentiment in the sector,” said Shah.  Thus, for now investors have a wait and watch attitude on the sector. 

In the long-run however it is the Indian growth story that will have a beneficial effect on the banking sector in India.  “The Indian economy is on an up tick and going by its strong fundamentals the growth story will continue. Investor sentiments are likely to be upbeat. There may be some dampening of their spirits in the wake of scam coming to light but overall the positive sentiment will override,” said Joshi. There may however be tightening of liquidity in some sectors for a brief period.

“We recommend investors buy large cap stocks like HDFC Bank (higher CASA and corrected), Bank of Baroda (strong asset book) and among other mid-caps Oriental Bank of Commerce (cheap valuation) and Development Credit Bank (sharp correction and turning profitable) in current market conditions,” said the ICICI Securities analysts.

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