Goldman Sachs in a report said,
Most bank stocks have outperformed the market by 5% to 10% over the last three months given expectations of a buoyant economy and lowered risks
to earnings. Banks have delivered strong operating performance in 4QFY2010 and will, we believe, continue to deliver strong PAT growth of 14%-28% driven by (1) credit growth of over 20% in FY11E and FY12E vs. 18% (up from a low of 14% in February 2010 from infra, working capital), (2) margin expansion of 15 bp-30 bp for most banks from higher lending rates, (3) fee income CAGR of 25%-30%, and (4) manageable NPL provisions
PSU banks’ valuations are attractive at 1.2X to 1.6X P/B FY2011 vs. expected CAGR earnings growth of (15% to 20%) FY2010-FY2012 and high ROE (16%-20%), while we believe private banks’ stock price performance will be driven by strong earnings growth (24%-35% for our Buy-rated stocks) and improving ROEs (18%- 20%). We are upgrading SBI to Neutral from Sell, given (1) a strong economy bodes well for SBI as a result of its huge branch network and should drive credit and deposit growth, (2) high liquidity in the stock should result in SBI trading as a proxy for Indian financials exposure, and (3) a low valuation of 1.6xFY11E (standalone) P/BV vs. private banks will likely drive performance despite a low ROE.
