Mid-cap bank stocks might outperform in near-term: Mape Sec

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Mid-cap bank stocks might outperform in near-term: Mape Sec

Udit Mitra, Director - Research, Mape Securities joins CNBC-TV18 to discuss how the banking stocks are positioned in the current rate-sensitive yet high-inflation environment.

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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 Andhra Bank BSE | NSE 01/06/12 Are Mutual Funds betting on Andhra Bank? Other Stocks in this news Dena Bank | State Bank of India | Jammu and Kashmir Bank | Development Credit Bank | Vijaya Bank | UCO Bank |

Udit Mitra, Director - Research, Mape Securities joins CNBC-TV18 to discuss how the banking stocks are positioned in the current rate-sensitive yet high-inflation environment. Headwinds persist for the sector in the short-term and the largecap stocks are unlikely to outperform over the next 3-6 months, he says. However, mid-cap and small cap banks with high CASA ratio, such as Dena Bank, J&K and Andhra Bank, have a potential to outperform the Sensex or Nifty, he observes.

Below is the verbatim transcript. Also watch the accompanying video

Q: Banking stocks have been underperformers almost since December. A bigger fall coming in after the credit policy itself, how do you see it panning out from here on considering that RBI isn't done with rate hikes?

A: If you look at the last four-five months, there are concerns on interest rate hikes, and with inflation still remaining sticky, RBI has still some way to go. Alternatively, you have to look at it from an optimistic point of view; if the government can get in with diesel price hike, then this time around, RBI can go ahead with a CRR hike of 25 bps as well, instead of a repo rate hike. However, there are short-term headwinds which remain. I do not see on a 3-6 months period banks stocks are going to outperform the Nifty or the Sensex. We remain equal weight on the sector.

Q: Let us talk of individual stocks. What would be your call on Andhra Bank and on Dena Bank and could you give us your price targets as well?

A: Rather than going for a sectoral rotation, it will be individual stocks which will be performing better. We have a target price on Andhra Bank of Rs 191 and on Dena Bank, we have target price of Rs 135. We feel that their core business which is basically net interest income and the margin, they are in a better position to preserve it, as their CASA ratio is higher than the competitive landscape. We continue to prefer banks who have a higher CASA ratio; even if de-regulation takes place, they will be the better benefitted compared to other banks. So we continue to prefer these two banks in the PSU segment.

Also read: Kotak Institutional overweight on banking stocks

Q: Would you have a view on the biggest of them all, State Bank ; it took a badgering after its numbers. Would you say the bad news is in price?

A: Yes, the bad news is in the price. However, the market obviously will be interested in looking at how the new management takes it over and whether they go behind the growth vehicle again or go for the credit cycle boom. As of now, they are being hard on the street, a bit conservative from the previous management. That's going to define the way going forward, how SBI is going to play out.

Q: So you wouldn't have a buy just yet?

A: No, not yet, because the macro uncertainty is very much. If your GDP numbers are being questioned everywhere and with the global macro hang from eurozone, from US, from Japan also playing into it, its very difficult for the banks to outperform the Nifty or Sensex in the short-term. For it to do, SBI has to play a big role. I don't see that happening at least for next three-six months.

Q: You don't have too many large banks in your portfolio, do you believe there is better opportunity in some of these midcaps and small-cap banks?

A: If we look at the performance over the last decade, when the entire focus was on Indian banking and the largecaps were doing very well with very good credit uptick, most of them were beating the system loan growth. Time has come to shift focus to the midcap space. They have got their operations in place, their cost income ratio under control, understood the sector well and a big ticker which can play out for the midcap banks is the fee income possibility where they have lost the entire decade last time around.

Credit growth for banks in the midcap and smallcap space will be much higher than the system. So, the basic parameter for banks to outperform is the credit growth and whether they are going to preserve the margins. Here, banks with higher CASA ratio are likely to outperform. Jammu and Kashmir Bank has a monopolistic business running in the J&K state, apart from high CASA ratio. So they are better positioned to outperform over the next 3-6 months.

Q: In small private sector banks space one of the recent outperformers has been Development Credit Bank . Yet, you have a hold?

A: We have a hold because it's very expensive and it is going through a turnaround. Last three quarters have been good, but before we go for a buy on it, I would like to see it for another 2-3 quarters. Recently, they got a branch license for ten more units. Earlier, they had only two branch licenses, so we were a bit skeptic on the growth. The market, however, seems to give a premium of 20-30 times their earnings for next year, (FY12) which I feel is a bit premature. We are definitely keeping it under watch. We will wait for some more time to see how the things play out over the next two quarters.

Q: What about sell, you have a sell call on Vijaya Bank , do you think the run is done for that one?

A: We have a sell call on UCO Bank and Vijaya Bank, partially because we have analyzed their balance sheet for the last two years; most of the growth are funded by wholesale. They are still continuing with the same motto trying to ride the yield curve with the bulk deposit going up. I have a feeling that their margin will be highly compressed because we do not see the rates stabilizing anytime soon and the refinancing risk going on. Also slippage on quarter on quarter basis for the last 7-8 quarters has been pretty much higher than compared to peers. That is why we remain bearish on these two stocks. High cost funding and factors of credit costs playing out hampers their profits.