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Oct 30, 2010, 06.49 PM IST
Though JPMorgan's top picks from the banking sector include Bank of India, it has been downgraded after the second quarter results, says Seshadri K Sen. "The bank is seeing profit booking after the sharp run," he reasons.
Though the broking firmís top picks from the sector include Bank of India , it has been downgraded after the second quarter results, says Seshadri K Sen. ďThe bank is seeing profit booking after the sharp run,Ē he reasons.
ICICI Bank and Kotak Mahindra Bank are its other favourite picks from the space. ďWe are also bullish on Bank of Baroda as the earnings have been ahead of estimates. And, we prefer Punjab National Banks and BoB over State Bank of India . We also expect improvement in asset quality of ICICI Bank,Ē he adds.
Talking about the space at large, Sen says small and medium enterprises are picking up aggressively for public sector banks. ďAlso, the individual loan growth numbers look strong.Ē
Below is a verbatim transcript of Seshadri K Senís interview with CNBC-TV18ís managing editor Udayan Mukherjee. Also watch the accompanying videos.
Q: The Bank of India (BoI) stock has reacted quite badly post results. Are you disappointed or do you think it is a buying opportunity?
A: No, we downgraded the stock after the results. This stock did very well over the last quarter or so, ever since they showed improved asset quality with their first quarter numbers. The correction in the stock is more to do with profit taking.
The results werenít that bad per se but if you look at where expectations were, relative valuations which the other banks like Bank of Baroda (BoB) and Punjab National Bank (PNB) Ė Bank of India somewhat stood out and needed to deliver a strong result to support those stock prices.
They delivered an okay result and the stock corrected. I donít think this is something to be seriously worried about but vis-ŗ-vis valuations, the numbers have underperformed a bit.
Q: You were happy with the BoB numbers though, you are still bullish on that stock?
A: Yes very much. They beat us and the street very significantly in terms of profits. At the operating level, a lot of strong factors are coming through. 30% loan growth, improved margins, domestic margins now at 3.6% is very impressive.
An important facet of the loan growth is that they have relied very heavily on CASA and retail deposits. The traditional dependence on bulk deposits seems to have structurally gone away which is very important. All in all, an excellent set of numbers.
Asset qualities held up remarkably well. So yes, we remain positive. Valuations are not as comfortable as they were but if they continue to deliver performance and numbers like this, I donít think valuations will be too much of a concern.
Q: On public sector banks, what is your sense for the next six months because there are some lingering concerns on the tepid kind of acceleration in credit growth which a lot of the bank chairmen are talking about, it has not peaked up to the extent they thought even six months back?
A: If you have seen the individual loan growth numbers, they have all come in at more than 25%. On the ground there doesnít seem to be such a big issue with their loan growth. It is just that the overall loan growth number isnít coming through so strongly.
Some of them are growing market share in some of the new areas, for example retail - a lot of them seem to be doing reasonably well. SME is one area that is picking up very aggressively for the PSU banks. Maybe this 28-30% number that everybody reported in the first half wonít sustain through to the end of the year.
I donít think you end up with the very weak loan growth number at the end of the year. I donít think that is much of a concern at this stage. Valuations definitely are not cheap anymore but then a lot of them are delivering improved return ratios which support these elevated valuations.
Q: Your observations on the kind of aggressive provisioning we saw for some of these PSU banks in the current quarter?
A: Asset quality has been a little choppy. BoB was very pristine. Provisions are function of delinquencies and some of the others continue to show high delinquency. At some level, this is the last stage of the restructured books being washed out and whatever had to come out of that is coming out.
I donít think asset quality will be that much of a concern in the second half. You will probably see delinquencies slowing down and maybe recoveries should also start to accelerate a little bit. You will see provisioning numbers at worst at these levels or even slightly improved in the second half. I am not sure that incrementally that is a big area of worry for the PSU banks.
Q: PSU banks have done quite well expanding their valuations over the last six-nine months. From hereon is it easier from a tactical perspective to predict some kind of a period of underperformance out here or do you think they can march on?
A: I donít want to comment on PSU banks as a single entity. There are differences between PSU banks even in the last six months to one year where you have seen vast differences in the way some of these banks have outperformed others by a broad margin.
I would prefer to go stock by stock, look at it individually. It is much harder work that way but with the markets at 20,000 it is a stock pickers market, it is not a broad topdown market. BoB and PNB are two stocks that we like. For PNB the return ratio continues to be very strong and I donít think valuations have caught up as much.
Q: What about SBI?
A: For SBI, the return ratios and the operating performances are improving. I am a little cautious on SBI in terms of how the delinquencies pan out this quarter. The market expects delinquencies to remain at first quarter level which was about 40 billion so let us see how the results come through.
But operating performance wise I think SBI will continue to do very well. Margins are very strong and the year-on-year (YoY) margin improvement should continue into this quarter as well. Fee incomes are also coming through fairly strongly and they donít have the pension problem that other PSU banks have.
Q: What do you expect to see today from the results of ICICI Bank and what kind of a stock price performance are you expecting?
A: Results should continue to be strong. Margin improvement will probably be in very small increments from here but the big story in ICICI is asset quality improvement. If you see some of the other private sector banks, retail asset quality seems to be doing very well. There is scope that if not in this quarter, for the rest of the year in FY12, ICICI Bank will significantly surprise the market on credit costs.
The other big factor in ICICI is that loan growth is starting to come back. You wonít see a very strong number this quarter, but by the end of the year, you would probably see loan growth well into the teens. In terms of the big issues with ICICI loan growth and asset quality, both are getting sorted out. The stock is not cheap, about 17-18 times earnings ex-sub values.
But again if they do show this accelerating earnings growth profile and if they do surprise on asset quality, that stock could still have some legs to go on. We like ICICI Bank at these levels.
Q: Which are the next new banks coming up and which are the best positions in the NBFC space or otherwise to get the next couple of banking licenses?
A: That is purely in the rearmost speculation. Who is going to get a banking license is very difficult to predict but you donít need to go that deep. If you look at some of the smaller banks, a lot of them are positioning to now go in for fairly exponential growth for the next three-four years.
They have reached that critical mass in branches and the two which are very interesting from that perspective are Kotak Bank and IndusInd Bank . Those are two banks, which have created the infrastructure for very rapid market share gains over the next two years and even longer over the next four-five years.
If you want to look at the next big bank, you can go to the NBFC space but you donít need to. Even among the smaller banks, you can find these two which are possibly going to be the next big private sector banks.
Tags: markets, nifty, sensex, Seshadri K Sen, JPMorgan, Udayan Mukherjee, Bank of India, Bank of Baroda, Punjab National Bank, CASA, retail deposits, public sector banks, PSU banks, SME, SBI, ICICI Bank, retail asset quality, private sector banks, ICICI loan growth, banking licenses, NBFC space, Kotak Bank, IndusInd Bank
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