**[investwise]** Mid Cap PSU Banks Attain New Orbit-Andhra, Allahabad, Dena and UCO Bank

 

Euphoria Buoys Up State Run Banks Indian mid-cap banks are characterized by typical features like a regional concentration, balance sheet size (less than or around Rs1 trillion, some are even smaller), and an earnings profile that is largely driven by core income.  Majority of these are also the banks which have been besieged by problems of risk capital in the past. However, backed by a proactive government (which is infusing capital) and a conducive regulatory regime (liberalisation of branch licensing), these banks have now begun adding dominantly the organic growth factor to their strategic growth path. We initiate coverage on five mid-cap banks in this report (mid-cap universe) which are likely to strengthen their balance sheets, geographically diversify their businesses, and migrate to a better trajectory of earnings growth that has a stronger sustainability element. Investment Highlights Seeking a better geographic leverage Banks in our mid-cap universe are currently more leveraged to their regional economies and are now seeking to expand and broad base their business into the wider national geography. This expansion where we expect banks to add a cumulative ~600 branches FY11E-FY12E should help in the long term to generate more qualitative business. Business growth to remain healthy Smaller business entities can be victims of predatory instincts of larger peers. However, our mid-cap universe banks have continued to grow with a very healthy pace (~20%+) even in a very competitive and challenging FY10. We expect these banks to show healthy business CAGR of 20-25% during FY11E-FY12E. Healthy spreads and stable to lower credit costs to improve ROA of the banks Higher interest rate scenario resulting in rising loan yields would be dominant factors to drive the margins of our mid-cap universe stocks over the next 2 years. With the higher upgradations and cash recoveries and lower incremental slippages, we expect stable to lower credit costs (as a % of average assets) which would be ROA supportive for our coverage banks. Capital infusion to strengthen bank's balance sheets Banks in our coverage universe have either recently raised capital or are in the process of receiving fresh capital from the government. Though capitalisation never affected the growth of these banks, fresh capital helps improve the risk profile of stretched balance sheets and the Tier I replenishment is essentially doing that. Risk-reward and valuations more favourable for mid-cap banks than for large cap banks We reiterate "Attractive" rating to the Banking sector as in our view, core performance of the banks would be in better shape in FY11 and FY12 than FY10 in terms of credit, margins and asset quality. At current times, we perceive risk-reward and valuations are more favourable for the mid-caps than for the large cap banks. We initiate a coverage on five banks namely Allahabad Bank and Dena Bank with "BUY" rating, Corporation Bank with "ACCUMULATE" rating and The South Indian Bank and UCO Bank with "HOLD" rating. 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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