Bank Stocks Outlook: Seen firm next week on attractive valuation

[K.Karthik Raja]

Bank Stocks Outlook: Seen firm next week on attractive valuation
Saturday, Mar 29

Bank shares are likely to remain steady with a slight
upside
bias next week as current valuations are creating some buying
interest.
Market will be range-bound with a slight upside as there is no
fresh
selling happening.Bank shares have been beaten down on concerns of
mark-to-market losses following derivatives exposure overseas.
However, higher inflation may act as a spoilsport to a likely
rally.
High inflation always dampens sentiment as it increases fear of
some policy measures to be taken by RBI (Reserve Bank of India)
Inflation for the week ended Mar 15 was at 6.68%, up from 5.92% in the
previous week.Inflation remaining above the Reserve Bank of India's
tolerance level for the current financial year of 5% has sparked
worries of a cash reserve ratio hike.
Sections of money and equity market have been fearing a possible
CRR hike, following that the government had a cash balance of 1 trln
rupees with RBI.
The cash balance will come back into the system in April.
.
PAY HIKE
Banks will have to provide for wage revision arrears in 2008-09,
while some banks like Union Bank of India and Bank of India are
already providing in the profit and loss accounts
Provision for retirement benefit liabilities would go up, if
salary hikes
are higher than the expected 15%
Last week, central government proposed to hike salaries by 25-40%
under the 6th Pay Commission. However, banks' salaries are independent
of the pay commission.
In case negotiated wage revisions are higher than estimated, we
are running earnings sensitivity to a 20% growth in the wage bill.
Potential impact on FY09 earnings could be to the tune of 4-9% for
different banks.
State Bank of India, the country's largest bank, will take a hit
of 8.7%
in its profit owing to provisioning, if a 20% pay hike happens, it
said.
.
Our View :
Most of the buying is coming in large-cap stocks in
banking,Rating" Buy" on ICICI Bank following the attractive valuation.
'Buy Rating' on Yes Bank too after it clarified its derivatives
exposures are to top companies and there has been
no defaulting on these portfolio as on Mar 18.
Now is the time to buy, in our view, despite the stock having
recovered 50% from its low. Derivatives issue does not appear to be a
systemic one as most banks have indicated low SME (small and medium
enterprises) exposure.

Today's closing prices of shares of leading banks in rupees,
compared with a week ago, on National Stock Exchange:

Mar 28 Mar 19 % change
.
Andhra Bank 76.85 69.20 11.05
Bank of Baroda 302.75 271.65 11.45
Bank of India 273.25 238.10 14.76
Canara Bank 226.95 207.90 9.16
Corporation Bank 287.60 237.05 21.32
HDFC Bank 1407.00 1272.60 10.56
ICICI Bank 835.50 768.20 8.76
Oriental Bank of Commerce 185.80 162.15 14.59
Kotak Mahindra Bank 673.50 546.30 23.28
Punjab National Bank 530.30 461.50 14.91
State Bank of India 1677.80 1605.05 4.53
Union Bank of India 146.60 133.60 9.73
.
Sensex 16371.29 14994.83 9.18
Nifty 4942.00 4573.95 8.05
CNX Bank Index 8200.00 6456.55 27.00


K.Karthik Raja
Research Dept.