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Sector Review: Banking

Sector Review: Banking
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First Published: Mon, Mar 30 2009. 11 15 AM IST
Updated: Mon, Mar 30 2009. 11 15 AM IST
We believe that Monetary softening, strong Domestic Savings and falling Interest rates will help revive domestic demand from late FY2010E.
But uncertainty regarding the timing of the revival poses material risks for the Banking sector.
Concerns over asset quality and slowing credit growth will remain an overhang over both Private and PSU bank stocks so long as the macro-economic outlook remains bleak.
That said, after more than a year of falling stock prices, valuations for several banks are much below median levels.
In our view, the sector is well placed to navigate the ongoing downturn and valuations provide substantial margin of safety against potential worst case scenarios of asset quality deterioration.
In order to draw conclusions regarding the course of revival of domestic demand and correspondingly, banking sector earnings, we have provided projections and analysis of financial savings, combined fiscal deficit as well as sources and deployment of funds by the banking sector.
In our view, keeping in mind attractive valuations, a longer-term investment perspective needs to be adopted, in order to take advantage of the eventual upturn in GDP growth - and several factors are falling into place to make this imminent over the next 12-18 months.
From this perspective, we prefer private banks, in light of their stronger core competitiveness. Importantly, private banks are presently available at compellingly cheap valuations, based on historic trends as well as justified fundamental valuation multiples.
Our top picks are HDFC Bank and Axis Bank.
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First Published: Mon, Mar 30 2009. 11 15 AM IST
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