We have lost all hopes: Macquarie on banks

Loan growth, asset quality, margins expected to be disappointing in coming quarters

Macquarie has downgraded its ratings on public sector banks as it expects further disappointments in their loan growth, asset quality and margins. The brokerage has cut its 2013-14 earnings per share estimates by 30% for state-owned banks and about 5% for private sector lenders. 

 

“Earnings downgrades have sharply picked up for the sector but they are not over,” said Macquarie’s analysts Suresh Ganapathy and Parag Jariwala in a note to clients. The brokerage has downgraded its rating on State Bank of India (SBI) to ‘neutral’ from ‘outperform’, Punjab National Bank (PNB) to ‘underperform’ from ‘neutral’ and upgraded Kotak to ‘outperform’ from ‘neutral’.

 

“We have lost all hope. Nothing is going to happen till central government elections in April/May 2014 and we are now going to be in an extended period of low growth,” said Macquarie’s analysts.

 

At 2:05 PM on Tuesday, BSE’s Bankex was up 1.95%, while the Sensex was up 1.1%.

Macquarie recommends sticking to the ‘boring strategy’ of sticking to quality private sector banks such as HDFC Bank, ICICI Bank and Kotak Mahindra Bank.

 

“Stocks have corrected sharply and cheap have become cheaper. They possibly can get even cheaper. So valuation is a mirage. Positive catalysts are missing,” said Ganapathy and Jariwala. “Specifically avoid PSU banks which are very weakly capitalised. Valuations for them are deceptively cheap,” they said.

 

Public sector banks are trading closer to book value compared to 0.5 times P/BV (price to book value) on a reported basis, said Macquarie.