Sell HDFC Bank, says Sanju Verma

Sell HDFC Bank, says Sanju Verma, MD & CEO, Violet Arch Capital Advisors.

Verma told CNBC-TV18, "Our big house-view at this point of time is sell HDFC Bank and buy ICICI Bank. It is a switch and even a sell on standalone basis. The reason for a sell on HDFC Bank which is a big call is that in the last one year, the net interest income growth, which is one of the best parameters to measure, how efficiently a bank is run and how well the core income is growing, the NII growth has halved 25% one year back to just about 12% for Q3 of FY12 and I think in Q4 of FY12, it will stay in the region of 12-13%. Why would anybody want to pay close to four times price to book for a bank where the NII or the core income is growing at just about 12%. So what we are telling investors is don’t  get carried away by this 30% net profit growth which HDFC Bank has been showing every quarter for the last 20-30 quarters what have you.”
She further added, "The key to note is that on the core income front, things have tapered off big time and hence paying premium valuations is certainly not justified. Most importantly I think valuations of four times price to book were being paid to HDFC Bank because of its sheer conservatism. But I think they have thrown conservatism out of the window because now the retail portfolio accounts for more than 50% of their total loan book and this is growing at something like 28-29%, so that is scary whereas the wholesale portfolio that is growing at just about 13-14% and accounts for less and half of their loan book."
"If you are a conservative bank, which is commanding premium valuations, it is the wholesale loan book which should be growing, the retail loan book should not grow and the unsecured portfolio should grow in single digit but I think it is exactly the opposite which is happening and that is my concern and if you notice in the last two quarters, the 30% growth in net profit shown by HDFC Bank has come at the expense of lower provisioning, provisioning for the last two quarters consecutively is down more than 28-29%. So they have been dipping into the provisioning pool to pad up numbers and I think that is not a very pleasant scenario. So the big call is sell HDFC Bank, buy ICICI Bank."
"Within the smaller bank what we like is Allahabad Bank, which is trading at less than one time price to book, return on equity of more than 12%, business growth of 17-18%, of course the CASA is not very flattering, that is precise the only negative otherwise this is one bank within the midcap space, which has consistently been showing an NII growth of more than 20% and profit growth of more than 30%. So it would have to be Allahabad Bank on the midcap space, sell on HDFC Bank from the largecap private sector banking space and within the PSU banking space we continue to like SBI and believe that this is one stock which will outperform going forward."