[T.S.R:15920] Indian Banks At Frothy Levels, Feeding The Bubble...BNP Paribas

BNP Paribas Indian Banks-Full Of Froth   Time to book profit: We recommend investors to book profits in India Banks as the price run across the sector fully discounts the expected outlook in terms of loan growth, margin expansion and declining credit costs. Many stocks in our coverage universe are trading at extremely rich valuations, at or over +1 standard deviations from their historical mean valuations. The sector has outperformed the broader market very handsomely (by over 17%) since our upgrade of the sector on July 2, 2010. We believe it is time to book profits.   Key changes in our recommendations: BOI to Sell from BUY – credit cost turnaround largely priced in PNB, BOB and UNBK to HOLD from BUY – rich valuations, hence book profits .HDFC Bank to HOLD from BUY - rich valuations, hence take some money off the table  Current valuations pricing in blue sky and key risk to the thesis:  The price run in the sector appears excessive and looks to ignore some potential threats in the form of lower than expected credit growth, margin expansion lower than expectations due to deposit competition and for PSU banks further slippages from their restructured loans. There is simply not much margin of safety left now.  The continued surge of foreign portfolio investment into the banking sector is the key risk to our thesis. Our valuation gap analysis (highlighted in exhibits 3 & 4) indicates that private sector banks are better leveraged to liquidity driven multiple expansion than PSU banks.   The valuation gap between the private sector banks and the PSU banks expands during bouts of liquidity inflow. While the PSU banks have improved their act significantly over the last few years, the current multiples already price that in and any further re-rating will have to wait for its time. So we will be more biased towards the private sector banks.  Where to hide in the banking sector: We reiterate a BUY on ICICI Bank and Axis Bank with revised TPs of INR1270 and INR1750. We do not see any significant negative catalysts for these banks and we see further scope for multiple expansion from the current levels.  Valuation   At our revised TPs, Axis would trade at 3.4x and ICICI at 2.0x FY12E ABV.

Safe Harbor Statement:

Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.

 

Nothing in this article is, or should be construed as, investment advice.

 

 

 

 

 

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