Falling yields to benefit Canara, OBC, PNB: Siddharth Teli

Bank stocks fell 30 percent since May 22 and 22 percent since July 15 when the tightening steps were announced by RBI. But after RBI announced new measures yesterday, bank stocks rallied with Bank Nifty today opening at 9,652, higher than yesterday’s close at 9,218.95. It saw an intraday high at 9,766.10. Siddharth Teli, Religare Capital Markets, believes the biggest beneficiary of the RBI move yesterday will be PSU banks.

Over the next one or two days, depending upon where bond yields settle, stocks such as Canara Bank, Oriental Bank of Commerce (OBC), Punjab National Bank (PNB) could see more upside given their higher sensitivity to their bond portfolios, he says. In the PSU banks space, SBI continues to remain a preferred pick.

In private banks, he does not have a buy on ICICI Bank and Axis Bank. He is constructive on HDFC Bank at current levels as far as private sector banks are concerned and in the mortgage space he is positive on HDFC.

Yes Bank today has been the biggest gainer. With RBI announcing OMOs, yields have already started to fall. Yes Bank has almost 24 percent of its investment portfolios in corporate bonds and in these bonds there are fears of mark-to-markets given the sharp spike in yields in the past few months, Teli says. With yields coming down closer to 8.35 percent, it would be a huge respite as far as those losses are concerned, he adds. Those losses could now be much lower than what they would have been earlier. That is one of the key things helping Yes Bank, according to him.

Below is the verbatim transcript of Siddharth Teli's interview on CNBC-TV18

Q: In the private banking space what do you like? If we can start with Yes Bank because that is the big gainer today, up about 13 to 15 percent at various points in time? What are the advantages and are you changing any of your numbers on the stock?

A: As far as Yes Bank is concerned, clearly there were two things there. The shorter end range shot up meaningfully and they have significant chunk of their liabilities that come up for re-pricing. Markets were worried about that, so that would have an impact on net interest margins. To an extent that remains and that does not really change with this.

What has happened over here is clearly with the OMOs that have been announced, at the longer end of the yield curve - we have already seen bond yields come off meaningfully. Yes Bank has almost 24 percent of its investment portfolios in corporate bonds and these bonds there are fears of mark to markets given the sharp spike in yields that we had seen. With yields coming down and even as we speak these yields are closer to 8.35 percent that should be a huge respite as far as those losses are concerned. Those losses could now be much lower than what they would have been earlier. That is one of the key things that helps Yes Bank.

Valuations are quite attractive there and my sense is that there would be some easing in wholesale rates. Yes Bank clearly tends to benefit on that front as well.

Q: So you have changed your price target?

A: No we have not changed our numbers at this point in time. In the last 15-20 days, the stock has gone down meaningfully. We believe that this is a respite and quite positive as far as Yes Bank is concerned. It is purely one of the key beneficiaries of whatever happened yesterday, so we maintained our stance on this stock.

Q: What about IndusInd Bank? That is a Nifty stock. It was a big money spinner. It went up to Rs 500 and then it corrected quite a bit. Unlike Yes Bank it has quite a bit of retail funding as well. How would you approach a stock like IndusInd Bank now at Rs 370 in terms of its valuations, in terms of all these factors that are impacting some of these banks?

A: As you rightly said IndusInd Bank does have fair amount of retail funding. Their Current Account Savings Account (CASA) levels are far higher, closer to 30 percent as opposed to much lower levels for Yes Bank. I think the issue with IndusInd Bank was not only at the shorter end of the yield curve and their share of wholesale funding that clearly hurt them and it fell in line with other stocks.

The other issue with IndusInd Bank also would be the very high commercial vehicle (CV) portfolio where investors are sensing some kind of asset quality issues. So I think IndusInd was more to do with that. Apart from that valuations at IndusInd are far more expensive. Whatever has happened in terms of wholesale rates coming down, to that extent IndusInd also benefits, but clearly our call will be yes over IndusInd at these valuations.

Q: Any other buys in the private bank space?

A: We don’t have a buy on ICICI Bank and Axis Bank. We are not too positive on this. We are constructive on HDFC Bank at current levels as far as private’s are concerned and we like mortgages space so HDFC is yet another name that we like.

Q: There is value everywhere, but there are also NPLs everywhere. Where are you looking to buy if at all?

A: Clearly one of the key beneficiaries of this move are PSU banks. We have just put out a note yesterday saying that if yields were to stay at closer to 9.5 percent levels then some names like Canara Bank or for that matter Oriental Bank of Commerce (OBC) - Canara would have seen almost 96 percent of FY14 Profit Before Tax (PBT) get washed out on account of that.

So our sense is what RBI has done is that they have allowed held-to-maturity (HTM) portfolios to continue at 24.5 percent which was otherwise gradually to come down to 23 percent odd. Secondly, the transfer from available-for-sale (AFS) to HTM has been allowed at July 15 yields which were closer to 7.6 percent odd which essentially means that while PSU banks will still be left with some proportion of their portfolios in the AFS category, my sense is they will end up shifting most of the high duration securities into HTM.

What this essentially means is that while there could still be some mark-to-market (MTM) losses they will not be as high as they were expected to be earlier. Clearly that is one of the key things that is positive for them, but I do agree with you that Non-Performing Loans (NPL) remain a cause of concern and that will still be a theme.

So I think that over the next one or two days depending upon where bond yields settle these stocks could still see some more upside, specifically names like Canara Bank, Oriental Bank of Commerce (OBC), Punjab National Bank (PNB) - all of these names could see more upside given their higher sensitivity to their bond portfolios. But my sense is that over longer term people will still keep an eye on what is going on in the asset quality bit and we have not seen any respite on that front at this point.

Q: Would you use this opportunity to advise people to get out of PSU banks if they are or do you think maybe in the near-term, maybe in 7-10 days there could be some short-term bounce which could still be seen in some of these PSU banks?

A: In the short-term it is very difficult to predict where the stocks are headed. As I said this will be a function of yields. If yields were to come down further we might see some further rally as far as these names are concerned, but structurally our key call remains State Bank of India (SBI). We believe that while asset quality is an issue there it is a better liabilities franchise and the impact on margins there will be relatively lower. They are not borrowers in the wholesale market either. So that is a positive. So we will stick with that call.

SBI remains our preferred pick within the space. Keeping the AFS thing aside some names like Canara and OBC will benefit more, but Bank of Baroda (BOB) is another name that we like. So there is value everywhere, but for unlocking that we will have to see the asset quality cycle turn around. We are not seeing any signs of that at this point in time. So I would rather stick to names like SBI, BOB and maybe if you want to play value then we would get into something like an OBC.