The current rally seen in banking stocks is clearly driven by anticipation of a favourable election outcome because fundamentally things have not changed much on the ground says Siddharth Teli MD & Co-Hd, Instl Research Religare Capital Markets. The apprehensions still remain on the asset quality front.
With regards to public sector undertaking (PSU) one should look at banks that are well capitalisation, Bank of Baroda and State Bank of India are the ones that stand out. BoB is the best capitalised bank and trades at 0.7 times book says Teli.
He recommends buying BoB, SBI and Oriental Bank of Commerce amongst PSU banks but is negative on Union Bank and Bank of India.
Private banks like ICICI Bank, Yes Bank, HDFC Bank are currently trading a good valuations he said. Especially, ICICI Bank and Axis Bank which were trading at 1.6 times one-year forward.
The house is also bullish on NBFCs like Shriram Transport wherein he expects the commercial vehicle segment to see an uptick especially on back of second hand space. The stock could see asset quality pressures abating along with improvement in net interest margins.
Religare also remains constructive on power finance companies like PFC, REC, where the valuations suggest an upside for the stocks. The house is also positive on gold financiers.
Below is the transcript of Siddharth Teli’s interview to CNBC-TV18’s Anuj Singhal and Ekta Batra.
Ekta: What have you made of the rally that we have seen on the banking stocks and how much of it would you attribute to just an election rally and how much would it be even attributable to the fundamentals? Do you even see the fundamentals improving?
A: Basically, if you were to look at it stocks were badly beaten down until a few weeks back. So, in that sense asset quality has been an area of contention and I don’t think that there is much that changed on the ground. So, this clearly is to a large extent an election driven rally because at the ground level we have not seen things improve much.
Even if Q3 results were something to go by we have not seen much of a respite as far as asset quality is concerned. However, as I said some of these stocks were trading at really attractive valuations. Private names like ICICI Bank, Yes Bank, HDFC Bank they are all trading at good valuations specifically ICICI Bank which was trading at closer to 1.6 time one year forward and Axis Bank as well was trading at those levels. So, apprehension still remain on asset quality and at the ground level things might take some time to change but stocks have rallied in anticipation of a favourable election result.
Anuj: We have spoken about private banks but in the PSU banks the one that has really stood out is Bank of Baroda (BoB), I believe that is one of your top picks as well; further room there?
A: Our framework with the overall banking sector but more particularly in PSUs is that it is very difficult to predict asset quality across banks. So, capitalisation levels become a key theme from hereon. So, even if we have a new government and it is a start of a new cycle banks which are better capitalised will standout far better than some of those who don’t have capital.
The issue with PSU banks is that in the last three or four years capital has been consumed at a very high pace and some of the banks are now with core tier one equity ratios even below 7 percent. So, our framework has been to look at those banks where apart from asset quality you have very good capitalisation levels and that is where Bank of Baroda (BoB) and State Bank of India (SBI) standout. So, based on our numbers, we were just trying to see that if we were to look at 8 percent core tier one over a period of time then some of the lower capitalised banks could require dilutions immediately to the extent of 50-60 percent and then going forward there could be further rounds of dilution as well.
So, Bank of Baroda clearly stands out over there. It is the best capitalised bank, still trades at 0.7 times book, it might look at a premium to some of the other banks but if you were to adjust for capitalisation levels then my sense is we would still stick with Bank of Baroda as one of our favoured picks in PSUs.
Ekta: Which are the banks that you would not be bullish on within the public space because of lack of capitalisation or maybe equity dilution concerns in order to shore it up?
A: The only buy rated names that we have for now are State Bank of India (SBI), Bank of Baroda and Oriental Bank of Commerce. Punjab National Bank (PNB) is not a buy rated name with us but we are fine with PNB at current levels as well. Most other names we are not too comfortable with. The specific names that I would want to mention would be names like Union Bank and Bank of India where the impending dilutions could be extremely high and that could mean that it would create an overhang.
Secondly, given these dilutions happen at extremely cheap valuations and these are essentially funding and asset quality cycle rather than growth they are a) they dilute the book very significantly and the return on equity (RoEs) will also remain suppressed for a fairly long time.
For the entire interview watch video
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
