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Banking: PSU banks in limelight

Dec 24, 2003

2003 was a rather normal year in comparison to 2002, which saw a lot of activity in the banking sector especially in the context of policy changes. However, the year saw a further reinforcement of the fact that retail lending is here to stay and that too in a big way. This has been highlighted by the fact that, on an incremental basis, a majority of lending by banks is contributed by retail loans. Lending to the corporate segment however, witnessed a slowdown in 2003. The year also saw banks continuing their march towards higher profitability, mainly by booking profits on their G-Sec portfolios. This also helped them clean their books by way of higher provisioning for NPAs. In terms of policy decisions, unlike last year (passing of the Securitisation Act), this year saw only few issues being raised by the government regarding further liberalisation of the sector, including easing of FDI as well as voting rights norms. It was a good year for the banking sector as far as the stock markets are concerned. The full effect of the passing of the Securitisation act in December 2002, the strong growth in the bottomline as well as improvement in the asset quality of public sector banks seems to have led to a re-rating of banking sector (especially public sector) on the markets.

The table below indicates the five major gainers in the banking sector. Considering that almost all the stocks in the banking sector have gained during the last year, we have segregated the gainers from the public sector as well as private sector banks. Public sector banks have been the major beneficiaries of the changes that have taken place in the sector in the recent past, like the soft interest rate scenario and the passing of the Securitisation Act. While these changes have occurred over a period of 2-3 years, the perception towards public sector stocks has seen a sea change in the last 8-10 months. Hence, we can observe a rally in public sector banks.

(Rs) 1st Jan 03 10th Dec 03 Change
Oriental Bank 50 229 356.8%
PNB 65 178 171.7%
Vijaya Bank 14 37 161.1%
BOB 75 184 146.7%
Canara Bank 50 119 140.0%

The rally in the private sector banks has however, been rather driven by news flows regarding consolidation in the sector. This has been primarily due to expectations regarding easing of FDI limits as well as voting rights in private sector banks. When markets saw some developments on these fronts, private sector stocks started gaining ground in the latter part of 2003.

(Rs) 1st Jan 03 10th Dec 03 Change
J&K Bank 97 284 192.1%
UTI Bank 44 115 164.1%
IndusInd Bank 16 41 162.9%
Karur Vysya Bank 144 363 152.2%
Federal Bank 87 214 145.0%

The performance of the finance sector as far as the stock markets are concerned has been no different. Most of the companies under our research have shown strong gains in the period shown above. As far as HDFC is concerned, despite competitive pressures, the housing major continues to grow consistently and the effect of the same can be observed in the stock price movement over the last one-year. IDBI, on the other hand, gained due to the restructuring (there was a go-ahead from the government for the proposal to convert IDBI into a bank). IFCI also gained on expectations of a similar kind of restructuring.

(Rs) 1st Jan 03 10th Dec 03 Change
IDBI 21 60 179.6%
IFCI 6 18 209.6%
HDFC 356 589 65.4%

What to expect?

While the banking sector as a whole has seen a re-rating, a lot of the gains seen in the public sector banking stocks is due to strong growth in their bottomlines. However, we would like to point out that in the case of public sector banks, the rise in profits have been mainly due to falling interest rates that have led to large gains in their G-Sec portfolios. Interest rates, though soft currently, may rise once the investment cycle picks up and money inflow slows. We may see profitability of public sector banks hit if interest rates rise in the future.

Retail lending is likely to gain momentum due to the changing demographic profile of the Indian population as well as a low interest rate regime. All these indicators point towards an expected growth in credit offtake. The rally seen in private sector banking stocks was mainly in anticipation of ease in the regulatory environment. While norms regarding FDI limits as well as voting rights may be eased going forward, it may take a while for the same to occur and hence the investment horizon should be long term.

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