We are assuming/initiating coverage of six mid-sized Indian financial
companies. Yes Bank, IDFC, J&K Bank and Union Bank are our
favoured stocks and we rate them OUTPERFORM. We are also
assuming coverage on Kotak (NEUTRAL) and IOB (UNDERWEIGHT).
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Although, smaller in size than some of the financials already under our
coverage, these banks have carved their niches within the sector that
allow them to be as, if not more, profitable than their larger peers.
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After the slowdown and liquidity crisis in FY09, the wholesale funded
financials, IDFC and Yes Bank, are this year expected to reap benefits
of easier funding environment, as their funding costs drop faster than
peers’ and aid market share gains. Improved economic and capital
market activities should drive a rebound in growth in non-interest
revenues at IDFC, Yes Bank and Kotak Bank. All three are therefore
well positioned to expand on their ROEs in the current year.
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J&K Bank enjoys a virtual monopoly in its home state at 0.7x book is
one of the cheapest banking franchises in India.
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The two state-owned financials Union Bank and Indian Overseas Bank
however are set on a differing growth trajectory. While, Union Bank is
expected to outpace industry growth rates owing to its improving
deposit franchise, IOB is grappling with asset quality concerns.
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While, profitability of these banks are on a par with their larger peers,
on average, valuations are at a steep discount. We recommend IDFC,
J&K Bank, Union and Yes Bank for their 20-40% potential upside