Bank stocks among top performers on re-rating

On a day the Sensex touched the 20,000 mark for the first time since January 2008 on the back of overseas inflows, bank stocks were the leading gainers.

Five of the top eight gainers on the Nifty were financial services companies Axis Bank, HDFC Bank, Punjab National Bank, State Bank of India and Housing Development Finance Corp. The Bombay Stock Exchange’s Bankex rose to a record 13,993.32. Similarly, at the National Stock Exchange, the banking index touched a high of 12,335.10. Axis Bank closed at a record Rs 1,580 today, while State Bank of India had recorded a high of Rs 3,175 on September 13 and Punjab National Bank Rs 1,326 on September 16.

“Investor interest is driven by the growth of the economy where banks are the engine (funding growth through loans),” said Andrew Holland, chief executive, equities with Ambit Capital. “Also, globally bank stocks have performed well. It’s not just private banks but the public sector banks which are showing robust business growth.”

The strong position of Indian banks on Basel-3 capital requirements put them in a better position, said Abizer Diwanj, head of financial services practice at KPMG India. Indian banks have about nine per cent tier-I capital, higher than what foreign banks have, he said.

The Bank for International Settlement came out with higher capital requirements (called Basel-3) with an emphasis on core equity (tier-I). Global investors find safer banks more attractive and their key importance in fuelling the India growth story.

The Indian economy is poised to grow 8.5 per cent in the year to March, making it among the fastest growing major economies in the world.

“The economy is on a recovery path and banking stocks represent broad-base growth,” said A Balasubramanian, chief executive of Birla Sun Life Mutual Fund. “Besides domestic funds, foreign portfolio investors have also been chasing bank counters.”

Robust balance sheets, re-rating of public sector banks and flow of money into index funds are driving investors’ interests in banking stocks in the present market rally, he said, adding, Some public sector banks, which were undervalued until now, were re-rated (read increase in valuation). Their operating and efficiency ratios are improving and the gap between public and private banks is narrowing.

According to Morgan Staley, leading FII, the public sector banks, which account for over 70 per cent of banking assets in India, will witness re-rating to become an investment opportunity. The key drivers have been their improving efficiency. The cost-to-assets ratio has declined with employee productivity going up sharply. This would continue as employee costs are unlikely to increase at the same pace as assets growth, Morgan said. Improvement in lending spread was enabled by the change in loan mix (banks started going after consumer loans in mid 2000) and more price discipline.

One of the actions that positively surprised us recently was the move by these banks to increase the prime rate along with the deposit rates, the report said. Since they have more floating rate loans than deposits, this should help drive up lending spreads further for public sector banks.

A fund manager with a global investment management house said, the quality of balance sheet of Indian banks is superior to their global peers on three counts: First better liquidity ratios, cash and assets set aside to face rough times; second, prudent lending with lower lever of bad loans; and finally, they are reasonably capitalised to support an economic growth of over eight per cent.