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Will private sector bank valuations correct further?

With uncertainty over the magnitude of bad loans due to the moratorium, banks may face a rude shock in the coming months 

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Published 2 months ago on Jul 31, 2020 Read

Rajeev Thakkar
CIO, PPFAS Mutual Fund

The current fiscal is expected to be tough for financials — private banks, public banks and NBFCs — due to the loan moratorium. That is a key concern for the near term, but we see a lot of positives in medium to long term, primarily due to a big shake-up in the space. For instance, we have seen several exits in the NBFC space. Savings account and fixed deposit interest rates have also fallen dramatically, while lending rates have remained comparatively stable. This creates an opportunity to gain market share eventually. Thus, we are staying invested in certain private banks, which have comparatively stable management, unlike PSU banks. The latter also have the pressure of bailing out other failing banks and doling out loans to the weaker sections. Currently, most private banks are trading around 2-4x P/BV. Only once the moratorium ends, will we clearly know how much of the book value has eroded. Although it’s not the time to be significantly ‘overweight’ in financial stocks, one should not exit the space. Watch the good banks closely and invest when there is a big correction.

 

Pankaj Pandey
Head-retail research, ICICI Securities

Even if the RBI announces one-time restructuring, we believe it will only postpone the problem. Moreover, one would not understand the extent of the entire problem at least until the next two quarters. While some stocks are faring better and anchoring the overall market performance, banks will face their own set of challenges. The biggest challenge will be raising money above book value. Given the quantum of fund raising lined up, only a few banks might do slightly better. Thus, the market could get more concentrated. Select large banks are trading comfortably above book value, with HDFC Bank and Kotak Mahindra being the flag-bearers. For investing, one can look at Tier-I banks and should avoid everything else and not be adventurous. Currently, HDFC Bank, Kotak Bank and Axis Bank are trading at 2.7x, 3.5x (ex- subsidiaries) and 1.5x P/BV, respectively. But if earnings get impacted in the coming quarters, these valuations may fall. Given the Covid-related stress, one can expect 400-500 basis points increase in gross NPA ratios. For the banks to perform well, we need a healthy economy.