Business Standard

Analysis: Limited upside for private bank stocks

Many believe current valuations will cap significant upsides from here on

Related News

of most private sector banks made a new one-year high recently. ICICI Bank (Rs 1,135), Axis Bank (Rs 1,344), Yes Bank (Rs 458) and IndusInd Bank (Rs 429) made new 52-week highs on Thursday. Others such as HDFC Bank and ING Vysya have also made new highs in the last seven days. Though most analysts remain positive on given their consistent financial performance over the past couple of years, many believe current valuations will cap significant upsides from here on. Anish Tawakley, analyst - Financials, Barclays equity research, says, "The bank stocks have run up quite a bit and I don’t think we could see significant upsides from these levels.”

Adds Ravikant Bhat, Banking analyst at SBICap Securities, "The outlook has not changed for private banks. The valuations are catching up with their superior earnings performance, asset quality and balance sheet growth. We expect bigger banks in the private space to grow slightly ahead of system growth, but the smaller ones are likely to grow faster. Most private bank stocks are close to hitting our price target. Thus, fundamentally we are positive on private banks but upsides will be capped from current levels".

Hence, within the private bank space though, analysts are advising to being selective. Here are three key reasons behind this rally in private bank stocks, and how things could pan out going ahead.

Superior performance

Private banks have outperformed their peers in the public sector consistently on asset quality. And, the trend is unlikely to change any time soon, believe analysts. "We believe that the pain for PSU banks in terms of lower balance sheet growth and higher impairment ratios is likely to continue for fairly longer period, while the private sector players will be supported with strong capital ratios. We continue to like HDFC Bank and ICICI Bank", say analysts at Emkay Global. Tawakley too prefers HDFC Bank in the private space.

In the recently concluded quarter, private banks posted loan growth of 21%, higher than system level as well as PSU banks’ loan growth of about 15%. Strong traction in retail credit, which is relatively sticky and earns higher margins, fuelled loan growth of private banks. For FY12-14, driven by superior growth and return ratios private banks' return on equity (ROE) is expected to grow to 15.3%, while that of PSU banks is pegged at 12.7%.

Valuations now at historical levels

Stocks of many private sector banks (barring HDFC Bank) have underperformed the Sensex during fiscal year-to-date due to unfavourable macro and asset quality concerns. However, with most of these concerns being allayed, the stocks have rallied. But now, most private banks are trading in line with their respective historical average one-year forward Price/Book Value ratio, barring Axis Bank (slightly below its average multiple of 2.2 times).

Better placed in easing rate cycle

What’s more? Analysts believe that private banks are also better placed to benefit from easing interest rate cycle. This is because of the time lag in passing rate cuts by banks. This will enable them to protect their margins better as against PSUs which are typically the first movers in a rate easing cycle.

In short, private banks are expected to sustain their superior performance, but since valuations are close to fair levels analysts believe the upsides will be largely along the trend in broader markets.

Read more on:   
|
|

Read More

Two entities fail to make prima facie case to revoke ban: Sebi

The Securities and Exchange Board of India (Sebi) today said the restraining order on two entities, related to plunge in some mid-cap stocks in July, ...

Quick Links

 

Market News

OnMobile Global gains on improved cash position

OnMobile Global has gained around 9% at Rs 35.70 in early trade on BSE mainly on account of improved cash and cash equivalent position in the ...

Markets open at fresh high; Nifty above 8,200

The 30-share Sensex is up 198 points at 27,544 and the 50-share Nifty has gained 57 points at 8,226.

Markets may open higher on firm global cues and FII buying

FIIs were net buyers on Thursday to the tune of Rs 1,257.49 crore while strong economic data from US has lifted Asia markets

Sensex scales record high; Nifty within kissing distance

Unperturbed by end of US Fed's bond buying, equities post healthy gains

Higher open interest enthuses markets on expiry day

Rollover percentage in the Nifty was lower than three-month average, at 64%

Back to Top