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    PEs of 21 banks fall below 5-year average; is it time to look at them?

    Synopsis

    One of the reasons behind the sharp fall in bank stocks' prices is that earnings have failed to catch up as non-performing assets have surged.

    ET Online
    NEW DELHI: The index of banking stocks has plunged nearly 10 per cent so far in calendar 2016, and almost 25 per cent in last 12 months. One of the reasons behind the sharp fall in stock prices is that earnings have failed to catch up as non-performing assets (NPAs) have surged due to a slowdown in business activity and credit growth.

    Almost 21 stocks in the PSU bank space saw a sharp decline in EPS (earnings per share) compared with their five-year average, which include names like Allahabad Bank, Andhra Bank, Bank of Baroda, Canara Bank, Corporation Bank, Dena Bank, Indian Bank, IOB, PNB, and Syndicate Bank.

    Banking stocks have been the biggest drag on the benchmark indices in the past 12 months. In the Nifty50, financial stocks have the maximum cumulative weight of over 30 per cent. Which is why when financials take a hit, Nifty50 takes the biggest knock.

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    Even the PE multiples for most banks have contracted compared with their five-year averages, data compiled by ETMarkets.com showed.

    Most analysts were pencilling in a sharp pickup in the economy in 2015, but that didn’t materialise. Due to muted economic activity locally as well as globally, most manufacturing units faced liquidity crunch, which resulted in an increase in NPAs for banks.


    Image article boday


    “In an economic slowdown I would not like to see large banks, particularly the ones like ICICI Bank, to grow its credit aggressively. Because in this type of market, there are very few quality borrowers and even the retail segment can only take in a limited amount,” said Hemindra Hazari, hemindrahazari.com.

    “We believe asset quality issues have plateaued, but many poor numbers are going to come out from the entire banking industry,” he said.

    He said investors should avoid the banking sector, especially those banks which have very high exposure to corporate India. Gross non-performing loans of the listed banks touched Rs 3.5 lakh crore for September end 2015, a bag of assets that was not generating any income.

    “In the first two quarters of this financial year, banks set aside a little less than Rs 50,000 crore as provisions for bad loans. The quarters ending December and March could be worse, with analysts expecting total provisioning to touch Rs 70,000 crore,” said a report in ET.

    Bankers earn their income by lending money to borrowers and make money by the way of interest income and trading in bonds and currencies. Demand for loans remained sluggish due to muted economic activity with no new projects coming up.

    “The banking sector is a top-down macro call. The economy hasn’t really picked up to the extent we were expecting. So the recovery we would have expected in asset quality is going to be slow and gradual and that is probably weighing on some of the banking stocks, especially those which have very large corporate exposure in the metal sector,” Mahesh Patil, Co-CIO, Birla Sun Life, said in an interview with ET Now.

    “That pain is dragging valuations of some of these stocks, because there is no indication as such which can signal that we have seen the bottom in terms of asset quality,” he said.

    According to an ET report stocks of most PSU banks, except SBI, were trading below their book values - an indication that if a bank is put up for sale, it would not fetch the same value as shown on its books.

    Because of weak global demand environment, more companies have started to prepay high-cost loans either by selling off their non-core assets or refinancing old loans with new ones, experts said.

    To stem the damage, the Reserve Bank of India (RBI) dropped a list of 150 borrowers and asked banks to classify these loans as non-performing accounts even if the borrowers were paying on time.

    The asset quality of public lenders has led to increasing provisioning requirement, which has in turn impacted profitability of these banks. One of the prominent reasons is that there are a lot of realty, metal and infrastructure players on their books.

    The weakness in the global and domestic environment on the back of a slump in commodities has already dented profitability of banks.

    Banks are highly correlated to the growth in the economy, and a slowdown in the economy can potentially make debt exposure and heavy dollar borrowing of companies turn bad.

    “The kind of asset quality deterioration we are seeing should have happened a long time ago and this has now got accelerated because of RBI. But this is really the state of the Indian banking industry, both in the government sector as well as private sector,” said Hazari.

    Contra call on banking:

    At a time when most analysts have written an obituary for the PSU banks, some analysts believe it could be worth looking at some of them if one has an investment horizon of 3-4 years.

    “There is definitely some problem in the banking space, but I think the fears are significantly exaggerated. When I meet the analyst community, even for private sector banks they want to tell me that whatever is their corporate and international book, 30 per cent will be completely written off,” said Madhusudan Kela of Reliance Capital.

    “If I take 25-30 per cent off the balance sheet to be written off over the next three-four years, some of these banks become very compelling opportunities from a three-four-year perspective. Investors who have a three-four-year perspective can buy bank stocks then put money in bank deposits,” Kela said.

    Avinnash Gorakssakar, CIO and Head Research, Precision Investment, said something like SBI can be a good contra bet on the PSU side. However, the only hangover could be that it has again asked for shareholder approvals for a Rs 15,000 crore kind of offering.

    “In the near term, the stock may appear a little weak. But if you see the last two quarters, asset quality levels have improved marginally. This is a bank that represents India and once macro recovery comes in, it will be a good stock to look at if you have got a longer term horizon of say two years,” he said.



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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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