Tuesday, June 15, 2010

>INDIAN BANKS: Uncertainties receding (HSBC)

Rating changes. Downgrading Bank of Baroda to Neutral (V) and State Bank of India to UW(V) on stock performance and relatively high provisioning pressures, respectively. Banks to gain from EPS acceleration and PE rerating. We expect 24% EPS CAGR for our coverage banks over
FY10-12e vs. 18% last year, causing PE multiples to expand quicker than PB as the street starts to focus on credit and earnings growth upside rather than asset quality risks.

Three uncertainties diminishing. Loan growth, direction of short rates and asset quality trends are all closer to moving up than down, as economic indicators (PMI, industrial growth, overnight liquidity) point to a pickup in the credit cycle and tightening liquidity.

Earnings sensitivity analysis on these three parameters points to Canara being most leveraged and Punjab National Bank most insulated. We like both names given relatively attractive valuations vs. peers even after factoring in significantly higher provisions for Canara.

Multiples increased. We increase target PE multiples by up to 25% for public sector (PSU) banks to 7.0-8.5x, more so for Union Bank and Canara Bank which historically have traded at discounts to peers in the downcycle.

Near term prefer private banks… Underperformance of private banks to PSU banks by ~10% and private banks trading at discounts to their average multiples point to better entry opportunities, particularly given brighter growth prospects in the early stages of the upcycle as well as fewer asset quality issues and more flexible pricing power. …but over 12 months prefer PSU banks, which hold out promise of a higher PE rerating and earnings growth into the upcycle once near-term hiccups are overcome.

To read the full report: INDIAN BANKS