In an interview to CNBC-TV18 Rajiv Mehta, analyst, IIFL India shared his outlook on banking stocks. He reviewed the financial performance of stocks like Bank of Baroda and Allahabad Bank.
Mehta is bullish on PSU banking stocks like SBI and Allahabad Bank. However, he is cautious on Central Bank of India and expects them to register poor financial performance over the next few quarters.
From the private sector, he prefers ICICI Bank and Axis Bank. "We think HDFC Bank at about four times price to book is near its peak kind of valuations. So, people would want to play out more on ICICI and Axis Bank at this point in time," he elaborated.
Below is edited transcript of Mehta’s interview with CNBC-TV18.
Q: What have you made of Bank of Baroda’s number? It seems like a mixed bag, margins have been rather severely impact, but restructured assets as a trend appears to have gone down, good recoveries as well as upgrades. What do you make of both margins and bad loans?
A: Yes, you are right I think the numbers are a mixed bag because if you look at the operational performance it has not been too bad. It has been more or less in line with margins coming off by 15-17 bps, we were expecting that. Mainly, a large part of the fall has come because of the absence of income tax refund, which was present in the previous quarter.
But the key disappointing and more important factor has been asset quality. We have seen a large increase in the gross NPA to the extent of 20-25% on a sequential basis. Slippages have come higher than expected. I believe roughly the slippages are in a range of 12-13 billion, which is higher number.
Q: Do you see any more upside to Oriental Bank of Commerce (OBC)? Any other stocks that you can spot which are trading at lower valuations where asset quality hasn’t been too bad and could be bought into?
A: On Friday lot of midcap banks were being beaten badly and many of them had touched levels of 0.6-0.5 time book value FY13. At this point in time any good number would have a large reaction and which is what has happened with Oriental Bank of Commerce.
The numbers have been good operationally as well as the important feature has been an improvement sequentially in the asset quality, which was contrary to market expectations. That is why we have seen a very good rally in the stock.
Q: Your views on Allahabad Bank and are there any buy stocks in the PSU list now?
A: Allahabad Bank is one of them. We like the bank and the current valuations. It shows a good potential upside from hereon. Last quarter was very bad for Allahabad Bank, it came as a negative shock, but this quarter was very much reassuring.
We had seen slight deterioration in asset quality which was on expected lines, but operationally the numbers were strong. So at current valuation of 0.6x or 0.5x FY13 book Allahabad Bank is a stock that one can buy with the hope of the economy turning around.
Q: What would you advice people to buy and what sell at this point?
A: In PSU banks we like SBI and within the midcap banks we like Allahabad Bank. We still remain averse of Central Bank of India. We think that bad numbers could continue to play out over the next few quarters.
As far as overall banking space is concerned, we prefer private banks at this point in time. More importantly, ICICI Bank and Axis Bank because we think that HDFC Bank at about four times price to book is near its peak kind of a valuations. So, people would want to play out more on ICICI and Axis Bank at this point in time.