BNP Buy An Indian Basket Of Assets Through Ownership Of Banks After a decade of Outperformance against every benchmark Indian index, Banks are ready to go for even more. The banks raising money through QIPs are doing a service to investors-asset books can be grown, without paying exorbitant interest rates on new deposits. For the first time private sector banks are offering a mere 5 per cent to 7 per cent rate on deposits for periods over 5 years. This signals that India is entering an era of low interest rates, and not otherwise. A trend beneficial to industry at large and the Economy in particular. Private Banks select themselves outright, with roughly 3X adjusted book being the norm based on FY12 e earnings. What is changing in the sector – Three trends at work here: higher loangrowth for FY12 compared to our earlier expectation and declining credit costs, more meaningfully for private sector banks than PSU banks. Also, we are rolling our valuation basis to FY12, from FY11.
Key recommendation changes & recall our downgrade of these banks earlier – We upgrade Axis Bank, ICICI Bank, Bank of India andPunjab National Bank to BUY (from Hold) with increased target prices. We had downgraded these stocks ahead of the 4QFY10 results on concerns about asset quality and rich valuations (see our report, Time to book profit, dated 5 April2010).
What is driving the change to our recommendations
For Axis Bank, we are now less concerned about a possible spike in slippages from the restructured loan book and also we are increasing our loan growth expectation for FY12.
Given the robust 4QFY10 asset quality performance and looking forward to FY12, we upgrade Axis to BUY (from Hold) and raise our TP to INR1,500.
For Bank of India (BOI), we still expect some asset-quality pressures in the next 1-2 quarters and, accordingly, we factor in LLP of 108bps versus 110bps in FY10.
Despite the conservative outlook, we see reasonable upside from current levels and upgrade BOI to BUY (from Hold) with a revised TP of INR400.
We upgrade ICICI to BUY (from Hold), as we believe the price correction in the stock has been excessive. We had downgraded PNB to Hold ahead of the 4QFY10 results on rich valuations and asset quality concerns.
Despite factoring in 99bps in LLP (70bps in FY10), we believe there is sufficient upside available in PNB and we upgrade to BUY with a revised TP of INR1,200. Our estimate changes are highlighted in Exhibits 1 and 2.
Key risks to the thesis. We see two key risks: RBI deviating from ourexpectation of 'calibrated rate hikes' due to sustained inflation pressure and a reversal of global liquidity flows away from India.
Valuation
At our revised TPs, Axis would trade at 2.9x, IIB at 2.9x and ICICI at 1.5x and IDFC at 2.9x our FY12E adjusted BV. Safe Harbor Statement: Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints. Nothing in this article is, or should be construed as, investment advice. |
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