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Banking: Under performer - Views on News from Equitymaster
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  • Dec 27, 2001

    Banking: Under performer

    Banking stocks in general have under performed the markets in 2001. While the Sensex has come down by 19% since January 2001, banking stocks have witnessed a sharp drop in valuations. Specially, private sector banking stocks have seen huge erosion in market cap despite maintaining stellar growth in financials.

    Among the private sector banks, Global Trust Bank (GTB) was the largest loser. GTB's alleged involvement in the stock market activity cast a shadow on its business and resulted in deterioration in financial performance. Lack of confidence on the management has impacted its valuations severely. HDFC Bank on the other hand remained steady due to its consistent performance and high management quality.

    Current price v/s change since
    Private Banks Jan-01 Apr-01
    ICICI Bank -43.4% -49.5%
    HDFC Bank -1.7% -1.5%
    UTI Bank -43.4% 8.1%
    Global Trust Bank -77.1% -38.0%
    IDBI Bank -37.7% -3.5%
    Bank of Punjab -23.5% -19.4%

    Among the public sector banks, Bank of Baroda (BOB) was the largest loser and Corporation Bank gained about 25%. With increasing globalisation, banking sector is looking for new business avenues such as insurance and retail finance. Corporation Bank was among the first to enter into equity and distribution tie-up with LIC to foray into insurance business. Public sector banking stocks in general however outperformed the Sensex.

    Current price v/s change since
    Public Banks Jan-01 Apr-01
    SBI -8.5% -7.7%
    Corporation Bank 25.0% 11.3%
    Bank of Baroda -16.2% -32.8%
    Bank of India -0.3% 40.5%
    Oriental Bank -7.0% -17.0%

    Interest income of the sector has been impacted severely due to a slowdown in credit offtake resulting from downturn in industrial activity. The Index of Industrial Production (IIP) grew by a mere 2.3% during the first half of FY02. This was less than half the growth of 5.7% recorded in the comparable previous period. During the period April 2001 to November 16, 2001, non-food credit grew by 11.7% as against 20% growth recorded a year ago. Overall credit growth at 14.1% was also lower than 21.4% achieved a year ago. During the same period, total deposits of banks grew at a lower rate of 15.6% on a YoY basis against 18.5% during the corresponding period of 2000. The slowdown was expected as the impact of a one-time inflow of RIB fund evaporated from November 16, 2001.

    With lower credit growth both in food as well as non-food, banks deployed more funds in government securities. Month to date till 16 November 2001, investments by banks in government securities jumped by 22.5% compared to 19.8% growth recorded in the corresponding previous period.

    Banking system is flushed with excess liquidity due to market recession resulting in lower credit offtake. Interest income of banks in general witnessed lower growth rates in first half of FY02. Declining interest rates coupled with challenging environment pressurized interest margin of banks. Yields on government securities also touched their all time lows recently. This is likely to lower interest margins further. If this was not enough, escalation in non-performing assets due to subdued industrial activity contributed in lowering earnings growth. However, a cost reduction exercise (through VRS and implementation of IT plans) helped banks in maintaining their net profit growth.

    Although, the sector has been banking on the immense growth potential in the retail finance segment, competition is likely to keep interest margins under pressure. Asset risk is also likely to increase with a rise in gross non-performing assets (NPAs). Consequently, higher bottomline growth could come only from volumes and from fee based income (included in other income). Since the performance of the sector is directly related to GDP growth (which is forecasted to be about 5%), an improvement in economic growth could only bring improvement to the financial performance of the sector and re-rating to the sector's valuations.



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