Banking stocks, which have largely underperformed, are on a roll since Monday. The BSE Bankex index was the largest gainer on Tuesday, closing up by 4.12%. Stocks like ICICI Bank, HDFC Bank, Union Bank and UTI Bank all closed yesterday in the green. Even on Wednesday, these stocks maintained that momentum.
HDFC opened at higher levels and closed in green at Rs 780.85. In the same way, SBI opened up Rs 5 at Rs 751 and finally closed at Rs 753.85. Even UTI Bank and PNB opened up from their Tuesday levels and ended the day in green. However, ICICI Bank despite opening at higher levels, marginally shed its gains and closed in red.
What's the trigger?
Analysts put this upswing to encouraging credit and the visibility on the interest rate front. "There has been a credit growth of 30% in 07. Growth has been encouraging also on the deposit front. Besides, there is more clarity about the interest rate cycle," says Vishal Goel of Edelweiss Capital. Goel further adds that as the sector has been an underperformer and it's now doing a catching up act.
The positive economic environment is also seen as a contributory factor in this rally. "Positive sentiments about the economic growth is having its own role," says Gulteckchandani. He feels that the talk of some legislative reform in the sector during the ongoing Monsoon session of Parliament is also rubbing off.
There are words doing the rounds that the foreign holdings in the PSU banks may be hiked. Further, the banks may be allowed to raise more offshore capital.
But the positive economic environment has always been there. What has suddenly spurred the stocks then? "Monetary Policy," says Goel. He says that the policy has reinforced the positive sentiment about the economy, in general.
Rupali Nemade of Nucleus Securities thinks that YV Reddy's optimism about the liquidity position in the short to medium-term has boosted the sentiments. She ascribes the upsurge in the stocks to their earnings numbers as well.
"Results have been better than expectation," she says. "The banks have reported an increase in their profitability on account of drop in their NPAs."
However, not everyone is willing to emphasise the role of results in this rally. Goel, for example, thinks that the results have played at best a marginal role. He attributes this to a bigger factor, which he thinks has come in the last couple of years in terms of the handling of the interest rate cycle by the banks.
"Earlier interest cycle used to put the banks in adverse positions by causing treasury losses and resultant hit on their bottomline," he says, adding, "to reduce their treasury book's exposure to the volatility of interest rates, the banks shifted 70% of the book to HTM and also lowered the duration of the investment. This lowered the risk in their balance sheet."
Will it last?
So is there any substance in this rally or is it just a passing phase? Opinion is divided on the issue. Nemade says that her organisation has a very cautious outlook on the industry, as it is prone to risk. Rising interest rate scenario, for example, she says, has the potential of hitting the margins of the banks. But both Gulteckchandani and Goel don't think that the rising interest rates could cause havoc. Gulteck believes that a 25 bps point hike is unlikely to affect credit offtake.
Further, as Goel says, even if there is an interest rate hike in future, it won't be of 200 bps that it will set cat amongst the pigeons. He doesn't think the value of these banks will subside so soon.
What's looking attractive?
Well, then which stocks looking attractive in the sector? Ravikant Bhatt of IDBI Capital says that those companies, which have got a very high fee based income, will continue to do well. While, the banks with higher borrowing cost are a bit risky, as the cost of borrowing could hit their margins.
Hot picks
In terms of specific stocks, Bhatt picks up SBI, PNB, HDFC Bank and ICICI Bank.
He says SBI is a leader in its category and has got huge franchise. Its other income is also increasing. As regards PNB, he says the bank has good retail franchise and has low cost deposit. He likes HDFC Bank because it has shown consistent growth in advances and is viewed as a safe bank. Also, it has got stable low cost deposit. He also shows a liking for ICICI bank because of its retail model and the quality of its assets.
Goel's picks are: PNB and ICICI Bank. He likes PNB because it is one of the best banks in the country and has got good franchise. Its margins are also good. Further, the cost of its deposit is low and has decent ROE. This all is backed by good selective growth strategy.
He picks ICICI Bank for its diversified play in finance. Further, in terms of the adjusted value of its subsidiaries, the stock is available at 1.4 times of 07 books.
Nemade's pick are: PNB and UTI Bank. She thinks both are good public sector banks and have good comparative valuations.
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