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Last Updated : Sep 08, 2015 09:40 AM IST | Source: CNBC-TV18

Private banks attractive after recent correction: CIMB

While the firm is reviewing its earnings estimates for these stocks, Siddharth Teli, Banking Analyst at CIMB, picks were Axis Bank, Yes Bank (at target price of Rs 1,000), HDFC Bank, (due to rate cut), ICICI Bank and HDFC, in the order.

Valuations of key private sector banks have become attractive after the recent correction, says Siddharth Teli, Banking Analyst at CIMB.

"Axis Bank stock trades slightly higher than 10 times its earnings, Yes Bank trades at close to 9 times earnings, HDFC Bank interestingly is at sub-16 times earnings; so we would be buyers at current levels here," he says.

While the firm is reviewing its earnings estimates for these stocks, his picks are Axis Bank, Yes Bank (at target price of Rs 1,000), HDFC Bank, (due to rate cut)and ICICI Bank and HDFC, in that order.

Meanwhile, credit cost would rise more for public sector unit (PSU) banks than for private ones, due to higher exposure to the struggling iron and steel sector, Teli told CNBC-TV18.
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Below is the transcript of Siddharth Teli’s interview with Latha Venkatesh & Reema Tendulkar on CNBC-TV18.

Reema: In this recent bout of corrections we have seen blue chips like an ICICI Bank sell-off more than 20 percent from its recent peak, Yes Bank has got hit very hard. What have you made of the selling that you have seen in particularly in private banks?

A: Selling in private banks came in as a bit of a surprise to us. From a fundamental strength point, we are not seeing any meaningful pressure as far as earnings are concerned.

So, we are also re-doing our numbers but I don’t think we are seeing any meaningful cuts as far as earnings are concerned. Iron and steel exposure for the sector is at 5 percent but when I look at our coverage universe, we are closer to slightly higher than 3 percent on outstanding advances.

The pain for public sector undertakings (PSU) banks is much higher there at plus 6 percent levels. Some bit of this is already restructured or classified as non-performing loans (NPL), so that incremental hit from here also should not be very alarming.

In terms of revenue growth itself, there might be some adjustments to numbers because we are not seeing credit off take come through at all. That, to a certain extent, could be on private banks as well. However, we are not seeing any material cut in earnings so far.

If I were to compare this with valuations on a five year average basis, these are trading at significantly lower than the average valuation.

So, from an earnings stand point, the risk levels are not very high and they should keep on gaining market share from PSU banks. So, stocks like Axis Banks it now trades at slightly higher than 10 times earnings. Yes Bank trades at close to 9 times earnings. HDFC Bank itself interestingly is at sub 16 times earnings so we would be buyers if at all at current levels over here.

Latha: Why was there such a big fall is it just that foreign institutional investors (FIIs) were sitting in the money and therefore the fall? Yes Bank and ICICI Bank and HDFC fell so sharply.

A: Very difficult for me to comment on that because this is flows driven and I don’t track this on a regular basis but all I can say is that from an earnings standpoint and from a valuation standpoint the risk reward is extremely favourable.

Latha: Is there a hierarchy within these four Yes Bank, Axis Bank, ICICI Bank and HDFC as well as HDFC Bank?

A: Our pecking order is Axis Bank followed by Yes Bank followed by HDFC Bank. Clearly one would want to buy more of HDFC Bank given the kind of volatility that we are seeing but that is our pecking order.

ICICI Bank would relatively be the fourth name on the list, while we add rating on the stock that.

On HDFC limited, we have a hold rating on the stock. I think the recent base rate cuts will have some bearing on the mortgage company especially if chunk of the book is floating rate in nature so that is precisely the call over there.

Developer funding will take sometime come by so yield spreads could be under some pressure or else growth could be under some pressure.

Latha: HDFC Bank that gigantic rate of 35 basis points does that make it more attractive and do you see it getting followed up? Others haven’t followed up?

A: If you were to look at it the timing this is not the time when credit off take really picks up in India.

Even if you were to look at it at this point in time before the base rate cut you look at the Incremental credit-deposit (CD) ratio we are still closure to 10 percent on credit growth and incrementally credit deposit ratios are closure to just slightly higher than 30 percent.

So, it is not that cutting a base rate will lead to very high credit off take right away because the investment cycle seems to be laid.

However, eventually others will have to cut some bit of their base rates for sure. So, it will lead to some disruptions in margins. Interestingly HDFC Bank itself, not a very large proportion, my sense is that slightly higher than 20 odd percent should be linked to base rates so we should not see much of margin disruption there.

To your question, we will have to see how banks adjusts their margins more so many from PSU standpoint.

Last week we have had draft guidelines suggesting that marginal cost of funds we used in there compute base rates based on their marginal cost of funds.

So some PSU banks are actually computing this based on their weighted average cost of funds and not marginal cost of funds.

So, we will see some base rates cuts come through. Banks will have to follow suit.

Reema: You indicates that there is likely to be some adjustments to the revenues of banks because credit off take is not been good and on top of that we are likely to see some pressure may be on the banks if based rates do follow. Yet you say that you don’t expect meaningful earnings pressure at least on the bottom line. How does that add up and secondly what would be the adjustments to the topline compared to your expectations?

A: In terms of numbers when I ever to differentiate between PSU banks and private banks I think credit cost are likely to go up more for PSU banks as opposed to private banks.

So, from a private bank standpoint we are not saying that we are increasing our credit cost materially so that is not really happening. From a topline standpoint it is not going to be extremely high because even if hypothetically credit growth were to languish then my sense is that it is PSU banks will grow at a much lower pace rather than private banks seeing significantly lower growth on topline.

Whenever I were to do aggregate numbers and if we were to incorporate any cuts if any it will be more skewed towards public sector banks more so the smaller banks which still don’t have reasonable amount of capital even if assuming the government of India were to do the infusions that they have been talking about.

So, never I were to do these numbers I still get a 24-25 percent earnings compound annual growth rate (CAGR) for an HDFC Bank so on and so forth. That is how it adds up the cuts could be relatively higher for PSU banks.

Latha: Was Yes Bank there in your pecking order?

A: Yes, it is one of our key picks.

Latha: Any price target?

A: We are closer to Rs 1,000 on price targets for Yes Bank and as I said it is one of our key picks along with Axis Bank and HDFC Bank.



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First Published on Sep 7, 2015 12:51 pm
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