Do they deserve a premium valuation? Well, we will have to see. My bet is that the bigger names (like Kotak and HDFC) certainly deserve a higher valuation.
The underwriting skills for other public banks/smaller banks still need to be tested (I don’t believe that AL/ML skills) have helped them underwrite better. Once the environment turns, they are going to see higher slippages, npas.
Once the NPAs start coming up in the next 3-5 years (higher loan rates, recessionary environment), we will see all of this play out.
Remember Warren Buffet’s quote, “Only when the tide goes out do you discover who’s been swimming naked.” And once that happens, we will see them gain market share swiftly.
My money is on HDFC, Kotak, etc. For me, they are now trading at a reasonable valuation of 3 – 3.5 BV. If they can grow advances at 15%+ over 5 years, they certainly deserve this. The NIM’s surely would contract but not by much, and the repo rates are going to be sticky for a while which is certainly better for banks.
Disclosure – Invested.
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