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India Banks
It Wasn't That Bad, But It Isn’t That Good Either
Financial markets and India’s longer-term outlook have improved... — We raise
values on the Indian Banks due to: 1) Market factors – lower market risk premia,
higher benchmark multiples, and 2) FY10E earnings growth – 3%-56% higher, as
we unwind some conservatism in loan-loss provisioning and build in capital market
gains. Consequently we raise target prices across our coverage by 14%-143%.
...but the real market isn’t changing as much — On the ground we believe things
were not as bad as the market suggested, loan growth remained reasonable, asset
quality was stressed but did not explode, and margin pressure was manageable.
Post the Government/market mood change, things are not that good either, as
stocks/expectations suggest: a) loan growth in the 16-18% range (14-16%
previously); b) an asset quality cycle ahead (albeit a shallow one); c) margins to
face more pressure; and d) risk aversion moderating but still there. Bottom-line,
market conditions have improved but not as dramatically as stock prices suggest.
Market gyrations apart, valuations will tend to mid-cycle/averages — We expect
banks to remain a high beta sector, and global/local macro will likely remain overriding
drivers. However, beyond this, we believe valuations will tend towards
historical average multiples (and not touch peaks, or revert to troughs) reflecting:
1) a mid-cycle economic environment, 2) mid-cycle risk appetite, and 3) relatively
high macro-economic volatility (particularly rising inflation and rates risk).
Downgrades/Upgrades — Strong stock performances lead us to downgrade HDFC
Bank, ICICI Bank and BOB to Hold (from Buy). We also downgrade Union and
Andhra Bank to Sell (from Buy). We upgrade PNB, Yes Bank, OBC and Corp Bank
to Buy (from Sell). We remain moderately Overweight the India bank sector.
It’s more the market...
Bank stock values, bank business expectations, and the perceived opportunity
set for Indian banks, all appear to have changed fairly substantially and
dramatically over the last three months. This is not an India Banks-only
phenomenon, but Indian banks seem to have been a disproportionate
beneficiary of the new buoyant mood.
As it stands, we believe these recent changes make a difference to the value of
the Indian banks. Towards this end, we increase target prices for the banks
under CIRA coverage due to a combination of: 1) Lower market risk (which we
use for our EVA-based valuation methodology), 2) Higher benchmark PBV
multiples (market multiples up over 74% from last years trough values), and 3)
Higher earnings (3%-55% for FY10E). Our upward earnings revisions are
largely non operational and market influenced, as we unwind conservatively
built up loan loss provisions and include higher capital market revenues.
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