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Limited upside for private bank stocks

Source : BUSINESS_STANDARD
Last Updated: Fri, Dec 07, 2012 07:41 hrs

pStocks of most private sector banks made a new one-year high recently ICICI Bank Rs 1135 Axis Bank Rs 1344 YES Bank Rs 458 and IndusInd Bank Rs 429 made new 52-week highs on Thursday HDFC Bank and ING Vysya have also made new highs in the last seven days Though most analysts remain positive on private banks 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 &ldquoBank stocks have run up quite a bit and I don&rsquot think we could see significant upsides from these levels&rdquoppAdds Ravikant Bhat banking analyst at SBICap Securities &ldquoThe 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&rdquoppWithin the private bank space though analysts are advising to being selective Here are the key reasons behind this rally in private bank stocks and how things could pan outbr  table cellpadding2 width400 tbody tr styleheight 15pt height20 td styleheight 15pt width390 bgcoloreeeeda colspan4 height20strongfont faceTahoma size3LESSER RISK IN PRIVATE BANKSfontstrongtd tr tr styleheight 15pt height20 td styleheight 15pt width106 bgcolor929373 height20font faceTahoma colorffffff size2strong of advancesstrongfonttd td alignright width70 bgcolor929373font faceTahoma colorffffff size2strongGross NPAstrongfonttd td alignright width53 bgcolor929373font faceTahoma colorffffff size2strongNet NPAstrongfonttd td alignright width137 bgcolor929373font faceTahoma colorffffff size2strongRestructured assetsstrongfonttd tr tr styleheight 15pt height20 td styleheight 15pt width106 bgcoloreeeeda height20font faceTahoma size2PSU banksfonttd td alignright width70 bgcoloreeeedafont faceTahoma size237fonttd td alignright width53 bgcoloreeeedafont faceTahoma size221fonttd td alignright width137 bgcoloreeeedafont faceTahoma size269fonttd tr tr styleheight 15pt height20 td styleheight 15pt width106 bgcoloreeeeda height20font faceTahoma size2New private banksfonttd td alignright width70 bgcoloreeeedafont faceTahoma size219fonttd td alignright width53 bgcoloreeeedafont faceTahoma size205fonttd td alignright width137 bgcoloreeeedafont faceTahoma size212fonttd tr tr styleheight 15pt height20 td styleheight 15pt width106 bgcoloreeeeda height20font faceTahoma size2Old private banksfonttd td alignright width70 bgcoloreeeedafont faceTahoma size224fonttd td alignright width53 bgcoloreeeedafont faceTahoma size208fonttd td alignright width137 bgcoloreeeedafont faceTahoma size254fonttd tr tr styleheight 15pt height20 td styleheight 15pt mso-ignore colspan width390 bgcoloreeeeda colspan4 height20font faceTahoma size1Figures are as on September 30                      Source Company Emkay Researchfonttd tr tbodytableppstrong Superior performancestrongbr Private banks have outperformed their peers in the public sector consistently on asset quality The trend is unlikely to change any time soon believe analysts &ldquoWe believe the pain for PSU banks in terms of lower balance sheet growth and higher impairment ratios is likely to continue for a fairly longer period while the private sector players will be supported with strong capital ratios We continue to like HDFC Bank and ICICI Bank&rdquo say analysts at Emkay Global Tawakley too prefers HDFC Bank in the private spaceppIn the recently concluded quarter private banks posted loan growth of 21 per cent higher than the system level as well as PSU banks&rsquo loan growth of about 15 per cent 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&rsquo return on equity RoE is expected to grow to 153 per cent while that of PSU banks is pegged at 127 per centppstrongValuations at historical levelsstrongbr Stocks of many private sector banks barring HDFC Bank have underperformed the Sensex during the financial 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 pricebook value ratio barring Axis Bank slightly below its average multiple of 22 timesppstrongBetter placed in easing rate cyclestrongbr What&rsquos more analysts believe private banks are also better placed to benefit from the 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 cycleppIn short private banks are expected to sustain their superior performance but since the valuations are close to fair levels analysts believe the upsides will be largely along the trend in broader marketsp

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