The Business oriented Government of Shri Modi Ji indicates a sharp pickup in economic growth in FY 2016 and slow the bad loan formation for Indian banks with strong possibility of recovery of restructured assets. Credit costs should stay elevated, given low coverage levels right now – but likely to be lower than our earlier estimates.
PSU banks like SBI, PNB etc need significant amounts of capital, given the weakness of tier 1, regulatory catch-up, unprovisioned NPL’s, and to fund economic growth. Stronger government raises hope that banks will be properly capitalized rather than piecemeal approach, which has been adopted till now by the previous impotent Congress Govt. To give a shot in the arm, RBI Governor and the AIBEA has been pressing for recovery of bad loans from the managements very aggressively. This implies that earnings growth will be very strong and investors will pay up for future growth. Over the last three years, investors were not willing to pay for EPS compounding in Indian private banks. As confidence returns, they should be willing to pay for the growth outlook.
What Past Experience Tells Us ?
We acknowledge that the corporate borrowers along with the General Managers and higher rank officials of PSU banks sanction loans in shady manner which leads to rise in NPA when the economy is mismanaged. However, history tells that Corporates are willing to pay-off once their profitability increases and this is exactly what is going to happen over the next 2 years.
Bank of Baroda
Exposure to the infra segment at 10% of total is lower than that of other PSU banks. The economic outlook has improved post a strong election outcome which can help in decisive policy action – increasing probability of recapitalization and higher growth. Loan book growth accelerates to 14% in F15e and 17% in F16e compared to 21% in F14e. EPS of 127 and 173 for FY2015 and FY 2016 respectively.
Bank of India
Bank is yet to provide for mortality related provisions and higher salary escalation rate, which keep operating expenses at high levels. Starting point of balance sheet is weak: Impaired loan ratio is high at 7.5%, coverage is low at 38% and Capital (CET 1 ratio) weak at just 6.8% as of Mar-14. Loan book growth is muted at 12-13% in F15e/F16e post a strong 28% growth in F14E. Margins (calculated) expand by 20bps and 10bps in F15e and F16e.
IndusInd Bank
Well positioned for the longer term, given: 1) strong retail franchise; 2) the company is still in the early stages of growth; and 3) management has done a solid job of delivering on key metrics. Loan book expands by 23% in F15e and 28% in F15e from 24% in F14. Average margins (reported basis) expand by ~10bps in F15/F16e to 3.9% owing to higher share of retail loans and lower cost of funds.
Yes Bank
Likely to deliver volume growth ahead of system in the coming years. Early stage of growth uptrend – relatively small, with just 500 odd branches and 0.8% market share in loans. Customer assets grow 21% in F15/F16e. Expect underlying margins improve by 20bps through F16e. Including free funds impact from assumed capital raise, expect margins to improve to ~3-3.1% levels in F15/F16e compared to 2.8% in F14.
Indian Banking and Financial Companies Stock Target Price
Bank / Target Price in INR
BOB 925
BOI 250
Canara 280
OBC 300
PNB 825
Union 165
IndusInd 680
Yes-Bank 600
ING-Vysya 665
IDFC 100
LICHF 360
STFC 875 (Shriram Transport)
MMFS 300 (M&M Financial)
SCUF 1650 (Shriram City Union Finanance)
Axis 2300
HDFC-Bank 1050
Kotak 1100
ICICI 1800
Look at technical Supports of each of these Banks on where to BUY or ADD. Smart Fund Managers like Prashant Jain of HDFC Top 200, Equity had allocated 26% of the funds to the banking sector to play the recovery and thus the funds have out-performed the others in the recovery. HOLD Your investments for Double Digit Tax Free Long Term Returns for the next 5 years.