Elara Capital claims that PSU banks are unfairly being painted by the same broad brush of asset quality concerns. It explains that asset quality concerns have dogged the Indian banking space over the last four quarters with PSU banks being particularly affected as stock valuations have come off sharply across the board. It views the uniform punishment of PSU stocks to be unjustified, and a reflection more of uncertainty, heightened by opaque asset quality and volatile slippage reporting; than of real economic risk carried on the balance sheet. PSU banks have in fact reported divergent asset quality signs and there is a case to view their books to be qualitatively different.
Elara Capital says that differentiating banks using an alternative approach to view asset quality risk and so instead therefore of trying to take a call on the proven unpredictable parameters of (1) the quantum of further asset quality deterioration i.e slippages (2) the timing of their recognition and (3) the success rate of recoveries and reductions – it has assessed PSU banks on the basis of their ability to absorb further credit cost increases over and above the base case estimates. The traditional approach of using absolute levels of (expected) NPL’s to rank banks doesn’t assess their ability to price in the asset risk and penalizes those who may have better risk adjusted spreads and high profitability cushions.
| Company | Rating | Market Cap | CMP | Target | Upside | P/E (x) | P/ Adj BV (x) | RoA (%) | RoE (%) | ||||||||
| INR bn | USD mn | INR | INR | % | FY13E | FY14E | FY13E | FY14E | FY13E | FY14E | FY13E | FY14E | |||||
| Allahabad Bank | Buy | 70 | 1,246 | 140 | 235 | 68.2 | 3.3 | 2.7 | 0.6 | 0.5 | 1.0 | 1.0 | 18.1 | 19.1 | |||
| AXIS Bank | Buy | 399 | 7,093 | 963 | 1,398 | 45.1 | 7.5 | 6.2 | 1.5 | 1.2 | 1.7 | 1.7 | 21.1 | 21.4 | |||
| Bank of Baroda | Buy | 257 | 4,578 | 657 | 925 | 40.8 | 5.1 | 4.5 | 0.8 | 0.7 | 1.0 | 1.0 | 16.9 | 16.9 | |||
| Bank of India | Accumulate | 179 | 3,185 | 312 | 405 | 29.9 | 4.6 | 3.7 | 0.8 | 0.7 | 0.9 | 1.0 | 17.1 | 18.6 | |||
| DCB | Buy | 9 | 165 | 39 | 60 | 55.6 | 12.0 | 8.6 | 1.0 | 0.9 | 0.8 | 0.9 | 8.6 | 10.8 | |||
| HDFC Bank | Reduce | 1,144 | 20,355 | 487 | 536 | 10.0 | 17.3 | 13.6 | 3.3 | 2.8 | 1.5 | 1.6 | 17.3 | 19.4 | |||
| ICICI Bank | Buy | 912 | 16,222 | 793 | 1,206 | 52.1 | 11.4 | 9.2 | 1.4 | 1.3 | 1.6 | 1.7 | 12.8 | 14.4 | |||
| Indusind Bank | Accumulate | 142 | 2,520 | 303 | 371 | 22.4 | 13.8 | 10.2 | 2.7 | 2.2 | 1.6 | 1.7 | 20.4 | 23.0 | |||
| Punjab National Bank Buy | 240 | 4,273 | 708 | 1,026 | 44.9 | 4.1 | 3.5 | 0.8 | 0.7 | 1.1 | 1.1 | 19.1 | 19.8 | ||||
| State Bank of India | Accumulate | 1,312 | 23,341 | 1,955 | 2,221 | 13.6 | 10.0 | 8.9 | 1.5 | 1.3 | 0.9 | 0.9 | 14.0 | 14.0 | |||
| Union Bank of India | Buy | 111 | 1,968 | 201 | 275 | 36.7 | 4.9 | 3.9 | 0.8 | 0.7 | 0.8 | 0.8 | 14.1 | 16.1 | |||
| Yes Bank | Reduce | 113 | 2,018 | 321 | 371 | 15.6 | 9.2 | 7.3 | 2.0 | 1.6 | 1.5 | 1.5 | 23.5 | 24.2 | |||
Stock selection using scoring framework
Applying this approach to the PSU coverage banks, Elara has assessed and scored its coverage banks on 5 parameters that cover profitability cushion and earnings capacity to absorb accelerated credit costs, credit risk, asset quality risk from restructured assets and finally valuation comfort.
Bank of Baroda, Punjab National bank and Allahabad Bank emerge as clear winners in the scoring model, and are also the top picks in the PSU space. ICICI Bank and DCB are top picks in the private bank space where the framework doesn’t lend well to differentiate amongst the banks.
Elara’s Best PSU Bank Stocks To Buy In 2012
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