Expert’s Watch: Betting on private banks

Expert WatchBanking Sector Outlook: The banking opportunity extent is fairly large, as India is still an under-penetrated market. Any bank which has a sound franchisee on both asset & liability sides is best poised to take benefit of the upcoming economic recovery, while those with a higher retail book and the ones which are managing risk, better have commanded premium valuations. 

Banking Stocks: Banking stocks have emerged as the best performers in 2017. The retail private banks are trading at a price to book of 3.5 – 3.8 times based on 2018-19 earnings.

Public sector banks, including corporate banks, and adjusting for subsidiary values, have been in a range of 1.2 to 1.7 times, and are realistically valued. If a recovery takes place, it could see rerating for corporate banks and there is a good scope for that.

How have PSU and corp banks handled the bad-debt problem? : The bad debt issue is considerably large and there is a provisioning of 35 to 40 percent on total stress. Every year, when provisioning is done, their coverage also goes up.

Resolutions happen through M&A or insolvency proceeding. Hence, the problem reduces over time.

In two years, the GDP would be Rs 190 lakh crore. Hence, if problem reduces and coverage improves, the impact of bad loans seen earlier will be less visible.

Further, many stressed sectors such as steel are fairly doing well, on account of the rise in prices. Gradually, recovery will get into to other stressed sectors in 2019 and 2020, whereby coverage will increase and credit costs will reduce which will lead to higher return on equity.