Most analysts and investors are staying away from public sector banks, in particular, even though they are trading at a discount to their long-term valuation benchmarks as the spike in non-performing assets (NPAs) is worse for them compared to their private peers.
Adding to the NPA worries is the diminishing hope of interest rate cuts and the slow-down in economic growth, which is expected to further weigh on corporate earnings and stretch out the NPA cycle.
Not surprisingly, most banking stocks have lost heavy ground this year and are trading at steep discounts to their valuations measured in terms of price-to-book value (PBV). The decline is starker for PSU banks, with Central Bank, SBI, Bank of Baroda, Bank Of India and PNB losing 30-50% of their value in the year so far. In wake of such sharp correction, these stocks are trading at 40-60% discount to their average PBV ratios for the last five years.
Besides valuations, investors also need to look at what has been the profitability of that bank over a cycle with yardsticks like return on equity, return on assets and credit growth over a period of time, said a fund manager.
As per Credit Suisse, which maintains a cautious stance on corporate lenders, current challenges are unlikely to be resolved quickly. It believes that with loan growth continuing to come from stressed segments like power, roads and SME, asset quality concerns may build. The stress is being felt by large corporates as well with an increase in demand for re-financing, it added. However, analysts are cherry picking stocks within the private sector banking space due to their relatively stronger fundamentals.
In a recent research note, Morgan Stanley said the sell-off in the banking space is a great opportunity to increase exposure to HDFC Bank, given the bank's impeccable loan quality and high profitability. While acknowledging that the slowdown is likely to affect the growth in retail lending over the next two years, the brokerage said it expects HDFC Bank to endure the slowdown through market-share gain.
Standard Chartered also maintains an outperform rating on ICIC Bank and HDFC Bank, while taking a cautious stance overall on the sector. While ICICI Bank has concentrated exposures to the large over-leveraged corporate groups, its growing proportion of retail loans, low exposure to SMEs and high capital adequacy more than compensate, said Standard Chartered in a note.