Bank Q3 results: How are experts reading BoB, Union Bank?

Excerpts from Markets Midday on CNBC-TV18 Watch the full show » ALSO READ News and Notices about Bank of Baroda See interviews with Bank of Baroda Management See what other Experts & Brokerages are saying about Bank of Baroda See previous Results of Bank of Baroda Bank of Baroda BSE | NSE 29/05/12 Are Mutual Funds betting on Bank of Baroda? Other Stocks in this news Union Bank of India | ICICI Bank | HDFC Bank | Axis Bank |

The Reserve Bank of India's (RBI) move to cut the Cash Reserve Ratio (CRR) by 50 basis points to 5.5% was met by widespread approval within the market, industry and the banking sector. The next item on their wish list? A repo rate cut to help prop up a weakening investment cycle, say analysts.

The RBI's move released Rs 32,000 crore with the focus now shifting from controlling inflation to restoring growth momentum as liquidity in the system tightens further.

Hemindra Hazari, head-equity research, Nirmal Bang Institutional Equities believes that because of the rumblings in the eurozone as well as domestic slowdown issues, India's economic slowdown will be prolonged for a while. Because of these woes, he expects banks to suffer and get impacted.

Mahrukh Adajania, banking analyst, Standard Chartered says valuations have corrected aggressively and that news on possible interest rate cuts by the RBI will fuel short-term rallies for now.

Both analysts give their reading and outlook for Bank of Baroda , Union Bank , ICICI and HDFC Bank .

Below is an edited transcript of their interview on CNBC-TV18.  Watch the accompanying videos for more.

Q: What is the key takeaway on Bank of Baroda? We did see a rise in restructured assets, but overall the profitability raises no concern. How would you approach it at this level?

Hazari: Overall, the profits have met market expectations and have been quite good, but if you look at the composition you will find that at the net interest income level the growth was quite normal. The jump really came into treasury profits which are always slightly volatile and given the domestic treasury developments in my opinion there really was not such a movement for one to book such substantial domestic treasury profits.

So, the kind of treasury numbers that Bank of Baroda has reported to me appear to be in excess and probably they needed that to do their bad debt provisioning. Therefore, if you see across the board, bank numbers which were reported and those which will be reported going forward, will show a very significant deterioration in asset quality. Today, we are already seeing those numbers which have come out for the industry, where gross NPAs have gone up about 30% and net NPAs have gone up about 50% YoY which only tells you what the state of the asset quality is like in the industry.

Q: What about Union Bank which came out with its numbers? Do you think the worst is over for that one?

Hazari: It all depends how you look at the economy going forward. We believe that because of concerns in the global markets, particularly in the eurozone as well as domestic slowdown concerns you are going to see a more prolonged economic slowdown in India. Therefore, we expect all banks to suffer and get impacted by that. Specifically in the case of Union Bank of India, it is a large Indian bank and therefore it cannot be insulated from the broader trends.

Q: How would you look at Bank of Baroda? Does the price take in all the disappointments regarding restructuring, restructured assets as well as bad loans?

Adajania: I think the core performance was strong and was inline. Trading gains were higher but the bank clarified that that was because they booked income on liquid mutual funds through their trading gains which they had not booked for the last two quarters. Different banks have booked that income in different quarters. That explains the high trading gains.

But in terms of restructuring and stressed assets, the real issue specific to Bank of Baroda is not even so much about the quantum of restructuring; it is on the restructuring or NPV hits. So, two banks announced results Bank of Baroda and Union Bank, but BoB's NPV hit was much lower than Union Banks' which is what has confused the market. So, that's really the issue.

Q: How would you play both the stocks at their current prices?

Adajania: In terms of stressed assets, stress in the economy is going to increase. But for interest rates to have an impact on asset quality will take some time. Most of the large corporate NPLs are policy driven rather than interest rate driven. So, stress will both flow through into the numbers over the next six to eight quarters and in terms of the past profitability track record BoB has a stronger balance sheet. So, I would prefer BoB.

Q: We have two big numbers coming out today also, Canara Bank and Bank of India. From the asset quality front how would you be placed on both?

Adajania: Just in terms of Bank of India their stressed assets are much higher than average sector levels. The focus again here will be on what NPV hits they take apart from the increase in restructured loans and NPLs, but I guess the focus again will be on NPV hits because that is what is confusing the market.

Q: What will you do with Axis Bank ? Would you now start playing for value over there or will that also be a victim of possible slowdowns and NPLs that you wont touch that stock now?

Hazari: In my opinion, any large bank with a large balance sheet which has been growing very fast into this kind of slowdown that we have had is bound to face the repercussions going forward. I believe we are going to go into a lengthy economic slowdown and any bank, be it a private or a public bank with a large balance sheet which has been growing aggressively has to pay for those consequences.

Q: Just to put things into perspective in a pecking order across the banking space what would it be?

Hazari: I am negative on the entire banking space. I have got a sell practically on all the large banks. The only exceptions where I would be sticking my neck out for a buy would be HDFC Bank and a small midcap PSU bank like Syndicate Bank.

Q: What would convince you to change a sell into a buy? If you want to upgrade to a particular counter which one would you possibly look at in terms of the highest possibility for an upgrade and what are the parameters that you would look at?

Hazari: One is on valuations. If the valuation really plummets to some very low price to book multiple or very low price to adjusted book multiple, which in the current kind of rise in share prices in the overall economy as well as specific to banks, I do not see that happening.

Two if the government takes strong measures to turn the economy around, either we get very strong capital inflows coming in from abroad or the government undertakes some very major measures in terms of reforms or injecting capital expenditure into the economy, which will increase the fiscal deficit. So, these would really make me change my macro economic call.

Q: The worry of NPL will be there but surely valuations would make some of the stocks a compelling buy atleast something that you would put on your radar, which would those banking shares be?

Adajania: I think that valuations have corrected aggressively which is why we also had a good rally in banking stocks recently, especially before the results came out and expectation of a rate cut and just because they had underperformed for a long time. I guess fundamentals do matter because what will really happen is that the newsflow on rate cuts will really drive short-term rallies but the quarterly results will play an important role in deciding which ones are fundamentally stronger.

I guess where banks have posted consistently good results and have a low stock of NPLs to start with or low base of NPLs should be good. So, from that point of view Yes Bank looks good. We remain positive on ICICI Bank and HDFC Bank and among state banks we remain positive on BoB.