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Banking: Where is it headed? - Views on News from Equitymaster
 
 
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  • Sep 5, 2001

    Banking: Where is it headed?

    The Sensex has slumped by 18% since January 2001 and by 9% since the beginning of the financial year (April ’01). On the other hand banking stocks in general have outperformed the markets.

    Rumours of a second round of consolidation in the banking sector, restructuring exercise carried out by the public sector banks and better than expected performance of the sector fueled the sentiment in the banking stocks.

    Among the private banks, HDFC Bank was the star performer, holding its gains. The stock has gained over 5% since the beginning of the year 2001, even considering the fact that it is the most highly valued stock in the sector. The stock price of UTI Bank and Global Trust Bank (GTB) remained volatile in the last 8 months. On the merger news both the stocks flared up, only to fall later post the failed merger. The sentiment in GTB’s stock was also affected on reports of its lending to K-10 stocks and thus it is currently trading near to its 52 week low. IDBI Bank too gained sharp buying interest in the last four months on its aggressive foray into the retail sector. The bank has targeted to improve the proportion of retail lending to improve profit margins and minimize the loss from non-performing assets (NPAs).

    Change in price since
    Private Banks Jan-01 Apr-01
    ICICI Bank -28.6% -36.3%
    HDFC Bank 5.6% 5.8%
    UTI Bank -37.3% 19.8%
    Global Trust Bank -77.3% -38.6%
    IDBI Bank -29.1% 9.9%
    Bank of Punjab -19.7% -15.3%

    The performance of most of the public sector banks (PSB) on the bourses was mixed in the last 8 months. All the banks have outperformed the Sensex since January ’01. Bank of India and Corporation Bank however maintained their upward journey consistently. The trigger for investment in PSB stocks was an improvement in productivity, reduction in NPA levels, stabilising interest spreads, declining staff strength and good earnings growth. Also, upgradation in technology (although at a slow pace) attracted buying interest. 26 PSBs achieved 70% computerization level by June 2001.

    Change in price since
    Public Banks Jan-01 Apr-01
    SBI 1.4% 2.2%
    Corporation Bank 42.1% 26.4%
    Bank of Baroda 2.1% -18.1%
    Bank of India 13.5% 60.0%
    Oriental Bank -2.3% -12.8%

    The banking sector has been affected by a slowdown in the industrial activity, which was reflected in the dismal growth in the interest income of these banks. Both public and private banks are now concentrating on income from non-fund based banking activities such as fees and commission, forex and money-market trading income. Other income of the private banking sector jumped by 117% in the June quarter YoY and the PSB’s reported a 25% rise in other income. This pushed the earnings growth of the entire banking sector by 27%.

    Going forward the premium valuations of private banks compared to public banks depends on their ability to maintain high earnings growth and quality of assets. The current downturn in the economic activity could result in increase in non-performing assets for most of the banks. The winner on the markets would be the one who can sustain the high growth in business without compromising the asset quality.

     

     

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