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.