CRR cut to improve profitability of banks by 2%: Angel

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CRR cut to improve profitability of banks by 2%: Angel

RBI signaled the reversal in policy stance in its last credit policy by slashing CRR by 50 bps to 5.5%. The move will inject Rs 32000 crore in the banking system which will allow banks to lend more and improve the liquidity crunch situation as whole.

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Excerpts from Markets Midday on CNBC-TV18 Watch the full show » ALSO READ See what other experts are saying about markets See what FIIs are saying about the markets See what Udayan Mukherjee is saying about the markets

RBI signaled the reversal in policy stance in its last credit policy by slashing CRR by 50 bps to 5.5%. The move will inject Rs 32000 crore in the banking system which will allow banks to lend more and improve the liquidity crunch situation.

Vaibhav Agrawal of Angel Broking feels a 50 basis point CRR hike can increase margins by about 4-5 basis points and profits by about 2% of the Indian banks.

Below is an edited transcript of his interview with Latha Venkatesh and Sonia Shenoy. Also watch the accompanying video.

Q: Have you tweaked up the numbers for some of the banks especially the private sector banks? Banks will get a little more money by way of CRR cut and that money will expand as the money multiplier brings more money in the months to come. Any revisions you have made?

A: Every thing else remaining unchanged, a 50 basis point CRR hike can increase margins by about 4-5 basis points and profits by about 2%. Of course a part of this could be passed on in the form of lending rate cuts going forward. With the direction of the monetary policy now changing, clearly this is a big positive for the banking sector with inflation clearly now on a downtrend. In fact for several banks we have revised our target prices by increasing the P/E multiples which were trading well below their cyclical lows. We have actually improved the outlook and recommendations on the sector.

Q: In the last one month, banks like UCO, Syndicate, DCB, etc are all up some 30-40%. Can you tell us for which banks have you increased the target price and improved the outlook?

A: The correction in these stocks itself even in December alone was so sharp that even after bounce back of 30-40% they are still trading well below their book values. Most of the banks are still trading below 0.7 times their price to book value. About a month or two back, we were positive on two or three of the PSU Banks but at this point of time we are cautious on just about three or four banks and have actually increased our target prices for rest of them. In the largecaps like Bank of Baroda , Punjab National Bank and Canara Bank we have actually increased our target prices. Even in case of the midcap banks we have actually sort of improved our rating for Corporation Bank and Syndicate Bank .

Q: What is your view on SBI?

A: After the sharp bounce back to Rs 2000 levels from Rs 1600 in SBI , the valuation upsides have been sort of already factored in to some extent. As the market keeps going up, even SBI would remain a market performer with a slightly upward bias especially now that the capital raising looks more certain which is positive for SBI.

Q: How much more of an upside do you see in Bank of Baroda from current levels? What are your expectations from Q3 earnings?

A: We still maintain a 20% upside on Bank of Baroda from the current levels of Rs 820. We expect it to be one of the better performers in terms of earnings as well. The bank will clock about 13-14% earnings growth in Q3. Even on the asset quality front, they are better placed than some of its peers. Asset quality and restructuring of loans will be the key trends to watch out. Bank of Baroda is one of our preferred picks in the largecap PSU banks.

Q: Asset book was not an issue so far for you. Would you look out for any chinks in the armor in case of Bank of Baroda?

A: Yes. Relative to the rest of the PSU pack, we would expect Bank of Baroda to post better numbers. If Bank of Baroda continues to give healthy numbers on asset quality front as well, then it will clearly lead to further re-rating for the stock.