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Banks: 'Private' score

Nov 9, 2006

Banking stocks were at the centre of the spotlight during the last couple of months, not without a reason! The month preceding the result season, and that which saw the 2QFY07 numbers trickling in, witnessed investors acknowledge the tenacity of the sector and its relevance in accomplishing the desired economic growth targets.It thus goes without saying that given the liquidity comfort and no perceptible slowdown in incremental lending, banking stocks garnered interest amongst investors. What, however, is distinctly conspicuous is the fact that at the end of the result season, while private sector banks continue to linger in the investors' portfolio, their public sector counterparts have lost out on relative weightage.

The pecking order…
 6th Oct 068th Nov 06Gain / Loss (%)
ING Vysya Bank145 174 20.0%
ICICI Bank703 772 9.8%
UTI Bank394 427 8.4%
SBI1,032 1,109 7.5%
HDFC Bank934 997 6.7%
IDBI 84 78 -7.1%
Bank of Baroda290 259 -10.7%
OBC269 238 -11.5%

We reckon the following to be the bone of contention for investors to shy away from PSU banks:

Performance speaks: While the first half performance of most of the private sector banks left investors more than happy, the PSU banking entities seemed to have failed to live up to their mark. The disappointment was also on the back of premature 'expectations' of huge provision write backs with the interest rates showing signs of stability. The private sector banks sustained growth rates above the sector average while their PSU counterparts faced margin (NIM) concerns, due to low retail access. The private sector banking entities also subjugated their PSU counterparts by capturing a large share of the fee income pie with their business interests spread across domains like insurance, security dealing, venture capital and asset management.

Hauling old legacies: PSU banks like OBC and IDBI are also hauling the legacy of their respective merger partners (GTB and UWB respectively), thus bearing the burden of higher delinquencies and franchise integration issues. While both the cases offer superior long term return prospects for investors, they seem to have been denied commensurate valuations at the current levels. Mammoth balance sheet sizes, bloated work force and lack of operating efficiency are some of the common characteristics that continue to remain associated with PSU banks. To shake off this image and get rid of their government legacy, PSU banks are now seeking more autonomy.

Risk tolerance: When it comes to tolerance towards interest rate risks or credit risks, private sector entities continue to score higher due to better hedge on the investment portfolio and better risk appraisal skills. The fact that their income is distributed across diversified asset classes also makes them more affable.

On the risk return matrix...
Despite their relative superior performance vis-a-vis the PSU players, investors must not ignore the fact that most private sector banks are adequately valued at the current levels, leaving very little upsides hereon. Infact, their current valuations spell concerns due to the fact that they are valued at nearly twice the multiples accorded to the largest of global banks. On the contrary, the PSU entities, despite an appreciable effort made towards garnering scale (consolidation) and improving efficiency, seem to have been denied an appropriate reward. The risk return matrix advocates the necessity for investors to revisit their allocation to the sector and reshuffle its contents accordingly.


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