Monday, July 29, 2013

Avoid Public Sector Banks

Avoid PSU banks: Analysts--Business Standard

Including, SBI, PNB, Dena Bank and Federal Bank, a total of 18 banks mostly from public sector are trading at their 52-week lows on BSE
When it rains, it pours. The rupee’s slide against the dollar and the Reserve Bank of India (RBI)’s attempts to curtail this fall have hit the markets hard, especially the banking counters, with most stocks hitting their respective multi-year lows.

The last 15 days have seen the central bank adopt aggressive measures to curtail the rupee’s slide such as tinkering with the daily borrowing limits by banks, reducing the liquidity adjustment facility (LAF), raising the marginal standing facility (MSF) rate, etc.

“Although we think these changes are meant to shore up the rupee and be short-term in nature, the market movement (equity and debt) suggests there could be a longer term shift in the monetary policy stance. Unless the government steps up to the plate and passes much needed reforms, we may even see RBI formally raising rates to shore up the rupee. Clearly the most exposed stocks to interest rate reversals would be those with excessive reliance on wholesale funding,” said Santosh Singh, analyst, Espirito Santo Securities.

Hit hard
Including State Bank of India (SBI), Punjab National Bank, Dena Bank and Bank of India, 18 banks, mostly from the public sector, are trading at their 52-week lows on the BSE. As many as 11 are trading at four-year lows, while Punjab and Sind Bank and United Bank of India are quoting at their lowest level since their listings. Corporation Bank, Oriental Bank of Commerce, Bank of India, Indian Overseas Bank, Andhra Bank and Central Bank of India are among notable banks trading at their lowest level since July 2009.

ICICI Bank, YES Bank, IndusInd Bank, Axis Bank, ING Vysya Bank, Karnataka Bank and City Union Bank are among few banks that declined between 12 and 27 per cent since July 15. The BSE banking share index, Bankex, has underperformed the market, by falling 12.4 per cent, compared to 2.2 per cent decline in the benchmark S&P BSE Sensex during the same period.
Stock strategy
Given the uncertain environment and macro headwinds, analysts suggest avoiding PSBs for now. “The Bank Nifty had broken a major key support zone of 10,850 levels and is moving in direction on below 10,000 levels in the August series. The volatility skew on Bank Nifty options is suggesting more downside, as the demand for protection using put options is more than compared to call options. Short-term traders should sell the Bank Nifty with stop-loss of 10,800 on the upside,” says Navneet Daga, derivative analyst, KR Choksey Securities.

“From the public sector banking space, heavy shorts have piled up on counters like Syndicate Bank, Union Bank of India, and Dena Bank. Among the private sector banks, is ICICI Bank can be sold,” he adds.

“As regards mid-cap private banks, the near-term pressure on net interest margins (NIMs) could be higher than earlier envisaged, though ability to maintain asset quality metrics could support above average return ratios,” suggest Nilesh Parikh, Kunal Shah and Prakhar Agarwal of Edelweiss Research in their July 23 report.

“Despite valuation comfort, headwinds in the form of margins, operating expenses, asset quality risk takes centre-stage for PSBs. We suggest investors avoid the PSBs for now,” they add.

Given uncertainty around how long the policy shift will last, and whether RBI will also formally raise headline rates to further defend the rupee, Singh of Espirito Santo Securities advises that investors take a defensive stance, in which case HDFC Bank and Mahindra and Mahindra Financial Services look best positioned among banks and non-banking finance companies, respectively. He has a ‘buy’ rating on both these counters.

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