Mkt over-bearish on bank stocks: Karvy Stock Broking

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Mkt over-bearish on bank stocks: Karvy Stock Broking

Hemindra Hazari, Head of Research at Karvy Stock Broking, states that FY08 loan growth is expected to be around 22-25%.

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Excerpts from Bazaar on CNBC-TV18 Watch the full show » RELATED NEWS Mkts may fall hard today; RBI move to slow economy down 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 Bank of Baroda BSE | NSE 25/05/12 Are Mutual Funds betting on Bank of Baroda? Other Stocks in this news Union Bank of India |

Hemindra Hazari, Head of Research at Karvy Stock Broking, states that FY08 loan growth is expected to be around 22-25%.

Hazari adds that Bank of Baroda  and Union Bank are very attractive buys at these levels. According to him, the market is over-bearish on bank stocks.

Karvy Stock Broking expects further tightening from RBI. Hazari comments that new private sector banks could see trouble in the NPAs.

Excerpts of CNBC-TV18's exclusive interview with Hemindra Hazari: 

Q: It's been a rough morning for banks, do you expect this carnage to continue?

A: This was expected today because of the unexpected rise in CRR on Friday. Having said that, our recommendation to our clients is to buy into this weakness because I expect banks to announce sharp increases in their PLRs with a minimum PLR increase expected of about 50 bps. Thereafter, you could see some correction in the net interest margin.

More importantly, we are seeing that in some of the banks that we cover in the public banking space like Bank of Baroda, Union Bank, Indian Bank, they are trading either very close to the FY07 book values or in the case of Bank of Baroda trading even at lower their book values. This would indicate that the market is expecting banks to report losses kind of FY08, which I think is a tall order because in the worse case scenario, you could see profits declining. But I do not see losses coming in. Therefore, we see great value in these bank stocks and that's what we are recommending to our clients.

A: One thing is that RBI's clear intention is that loan growth will have to slowdown. Therefore, we are looking at FY08 numbers between 22-25% in loan growth. In terms of bond yields, they will take a hit in bond yields. They will take a hit in Q4 and the way things are, they will also take a hit in FY08. But by and large, most of these banks now have derisked that portfolio. So although they will take a hit, it would not be that significant to have an overall impact on earnings.

I think the call here is there is so much negativity on the banking space; that will only come about if this economic growth that we are looking at, will totally stagnate, if the higher interest rate results in much higher growth in non-performing loans. In such a scenario, you see a hit on bank stocks. But at this stage, no one is looking at an economic stagnation, they are just talking about growth slowdown. So the kind of apprehensions that the market is seeing currently, I think has been over exaggerated.

A: Even the RBI is quite apprehensive about in real estate, retail loans. Obviously those banks, which have been extremely aggressive in growing those kind of assets have priced those assets finely, taking into account total risk there I see such banks having a problem especially if you keep increasing the interest rates on such assets because just as we have seen in United States, particularly in the subprime mortgage space, certain institutions, which had a high exposure to them have gone barely up. So such banks should be extra cautious because you may protect your margin by increasing the interest rates. But if the mortgage is unable to pay those higher rates, it could result in non-performing loans.

A: By and large, banks that have been aggressive in this space have been the new private sector banks and certain public banks also. But by and large, the aggression in retail has been led by the new private banking space. So if they have priced their loans finely, I would expect trouble to hit them.

A: On real estate, one has to distinguish between mortgages and commercial real estate. Normally, government banks have gone slow on commercial real estate and those banks, which have pushed real estate, have gone in the mortgage space. So normally, one can generalize that most of the large PSUs have already on the mortgage space and where you have seen high aggression has come from the new private banking space.

However, I would also like to add what's happening and which is what the RBI had dictated earlier that even in the mortgage space, which is normally a low risk area, one is seeing a lot of froth taking place. This has affected both government banks as well as private banks where the internal management has not caught on to such malpractices.

A: Definitely, I think we are still in the midst of it. I think there is more tightening to be done. Globally, when interest rates harden, bank stocks get hit. Banks are just intermediaries; whatever increase in their cost of fund happens, they have to pass it on to their borrowers. As long as they protect their margin and they are able to curtail the non-performing loans, they should continue to do well. They may not do as well as earlier, but definitely not the kind of valuations that they are currently being traded at.