Here's how Religare is reading BoB, BoI Q2 earnings

Siddharth Teli, Religare Capital markets picks Bank of Baroda and Oriental Bank of Commerce as his top bets among the PSB lot. Speaking about the bank's Q2 earnings, he said that the margins of BoB were more resilient than expectations on domestic front due to loan to growth deposits, which are now correcting. He expects an uptick in margins going ahead.

Teli also recommends a hold on Bank of India and has raised its target price to Rs 220. Below is the verbatim transcript of Siddharth Teli’s interview on CNBC-TV18 Q: What are your views on Bank of India, is it changing your mood or your call or your price target? A: It was a fairly good set of numbers and so, we have upped our target price but there has been a delta as far as rate of stressed assets formation is concerned. We have not changed our rating, we have a hold rating on the stock with a target of Rs 220. Our concern over here is that if we were to look at capitalisation levels of a lot of banks, Bank of India doesn’t fare too well on that count. It is very close to that 8 percent tier I and while we do appreciate that non-performing loans (NPLs) and restructuring formation levels have indeed come down, they are still at quite elevated levels. So even if these levels were to continue going forward then the dilutions could be huge. In that backdrop, we have not upgraded it to a buy, we are sticking with our top picks as Bank of Baroda which we have been highlighting for a while now and Oriental Bank of Commerce both of them have relatively better capitalisation levels. Q: Your top pick in the banking space is Bank of Baroda but that stock has already rallied about 30 percent in the month of October, does it still deserve a buy at these levels and have you upped your earnings estimates after post its numbers? A: It is the top pick within the public sector unit (PSU) space and not the entire banking space. There has been some upgrade as far as earnings are concerned so we have just upped our earnings by close to 5 percent for FY14 and 4 percent for FY15. Margins have been far more resilient on the domestic front as opposed to what we would have expected earlier and that comes from the loan to deposit ratios that are now correcting and hence the uptick as far as margins are concerned.
Also, the stressed asset formation levels are now down from almost higher than 5 percent levels on an annualised basis both slippages plus restructuring to closer to slightly higher than 4 percent levels. So, we are seeing that delta as far as stressed assets formation is concerned. Finally, fee income also surprised us on the upside. So fee income growth at 23 percent is fairly good in this kind of environment. Now, we were building in some kind of investment losses on the bound book as well but we have not really seen those, we are actually surprised to see some right backs at that book because there were some positions built post July 15 and those being in the money we have not really seen any meaningful mark-to-market losses on them. It is because of a combination of these factors that there has been a closer to 5 percent upgrade to earnings largely driven by relatively lower provisions as opposed to what we were building. The stock still trades at 0.7 times book so with tier I of close to 10 percent which is precisely the reason I have a top pick on that name.