WHICH ARE THE BEST BANKING STOCKS?
By Ruma Dubey
Almost all the banks that matter have declared their Q4 and FY13 numbers with the largest, State Bank of India declaring its numbers yesterday. And based on their performance for FY13, let us have a look at the comparative analysis of how these banks pan out.
Immediately at a glance itself, it is evident that the PSU banks are undergoing a lot of stress while the private sector banks are doing well and their asset quality is only getting better. They are healthy in terms of profitability as well as when it comes to provision ratio and NPAs. PSU banks have a long and tedious climb back. And it is this very fact which is reflected in the PE ratios of these banks, with the private sector banks all in double digits while PSU banks languishing at an average of 6.
In the short term, the sector continues to look treacherous, might look a bit dicey given the deteriorating asset quality, especially for public sector banks and the dull macroeconomic indicators. But in the long run, banks are the very edifice of our nation and once the economy starts showing signs of recovery, the rate cut cycle begins its journey, banks will once again become a much sought after sector.
Let us take a look at each factor which is today affecting the investment decision. Undoubtedly, at the top of our mind, is the asset quality. So let us take a comparative look at this most decisive factor first. We have compiled the data based on the five largest PSU and private sector banks.
ASSET QUALITY:
| PARTICULARS | SBI | PNB | BOI | CANARA | UNION BANK |
| Gross NPA | 4.75% | 4.27% | 2.99 | 2.57 | 2.98 |
| Net NPA | 2.10% | 2.35% | 2.06% | 2.18% | 1.61% |
| CAR | 12.92% | 12.72% | 11.02% | 12.40% | 11.45% |
| PROVISIONING RATIO | 66.58% | 58.83% | 60.92% | 61.35% | 65.21% |
| RESTRUCTURED LOAN(Rs in Cr) | 43,111 | 13,038 | 16,353 | 18,113 | 16,965 |
At this juncture, amongst PSU banks, tow of the largest banks have the biggest pain – SBI and PNB. Both have supposedly cleaned up their books and have stated that the pain looking ahead would be much less. Slippages will be there but it could come down substantially. Union Bank is the best placed purely on NPAs but the current quarter could be turbulent. The management has stated that it expects to restructure to the tune of Rs.2200 crore in Q1FY14 and this will come in mainly from the power and steel sector. Provisioning coverage ratio is expected to stay elevated.
| PARTICULARS | ICICI | HDFC BANK | AXIS | YES | INDUSIND |
| Gross NPA | 2.68% | 0.97% | 1.06% | 0.20% | 1.03% |
| Net NPA | 0.64% | 0.20% | 0.32% | 0.01% | 0.31% |
| CAR | 12.80% | 16.8% | 17% | 18.3% | 13.85% |
| PROVISIONING RATIO | 76.8% | 80% | 79% | 92.6% | 70.13% |
| Cost to Income Ratio | 40.5% | 49.6% | 42.6% | 38.4% | 48.84% |
The private sector bank does stack up much better and YES Bank scores top notch, followed by HDFC Bank. NIMs have held up or improved for most banks with ICICI and YES surprising on margins. YES has already provided for its exposure to Deccan and though its exposure to Suzlon is also pretty huge, the bank seems to have the ability to manage this stress. It has the highest provision coverage ratio in the sector at 92.6%. ICICI Bank is also back in the reckoning and many brokerage houses have given a buy call on the same. HDFC Bank’s cost to income ratio is pretty high but it is hoping to bring down the coming quarters.
PROFITABILITY
| PARTICULARS (Rs in cr) | SBI | PNB | BOI | CANARA | UNION BANK |
| NET PROFIT | 17,196 | 4748 | 2749 | 2872 | 2158 |
| NII | 57,877 | 14,857 | 9024 | 7879 | 7543 |
| NIM | 3.34% | 3.52% | 3% | 2.39% | 2.96% |
| OPERATING PROFIT | 40,922 | 10,907 | 7458 | 5890 | 5583 |
| CASA | 46.50% | 40.86% | 32.79% | 25.1% | 30.95% |
| BRANCHES | 14,186 | 5874 | 4292 | 3728 | 3511 |
| PARTICULARS ( Rs in cr) | ICICI | HDFC BANK | AXIS | YES | INDUSIND |
| NET PROFIT | 9604 | 6870 | 5179 | 1301 | 1061 |
| NII | 13866 | 16166 | 9666 | 2219 | 2234 |
| NIM | 3.11% | 4.5% | 3.53% | 2.9% | 3.43% |
| OPERATING PROFIT | 13199 | 11747 | 9303 | 2142 | 1840 |
| CASA | 41.9% | 45.4% | 36% | 18.9% | 29.32% |
| BRANCHES | 3100 | 3062 | 1947 | 430 | 500 |
Here PNB does well and its asset quality has also improved in Q4. In terms of NII and net profit, SBI is way ahead of the others. And in NIM, surprisingly, PNB is ahead of SBI and the rest. Ging ahead, PNB and SBI improve their asset quality. And SBI and PNB remain the safest bet for long term in this sector., The best are indeed the private sector banks and on the top emerges ICICI Bank, scoring highest when it comes to net profit and HDFC Bank with the best NIM and CASA. But the same YES Bank which scored so high on asset quality, comes last when it comes to profitability. It also has the lowest CASA amongst the top five. Axis looks good, much ahead of IndusInd.
VALUATION
| PARTICULARS (Rs) | ICICI | HDFC BANK | AXIS | YES | INDUSIND |
| EPS (Rs) | 83.29 | 29.10 | 119.67 | 36.50 | 21.83 |
| MARKET PRICE (Rs) | 1204 | 702 | 1458 | 505 | 499 |
| MARKET CAP (Rs in crore) | 1,38,921 | 1,66,953 | 68,291 | 18,145 | 26,092 |
| PE RATIO | 14 | 24 | 12 | 14 | 23 |
| PARTICULARS (Rs) | SBI | PNB | BOI | CANARA | UNION BANK |
| EPS (Rs) | 210.06 | 139.52 | 47.79 | 64.83 | 36.16 |
| MARKET PRICE | 2151 | 788 | 299 | 427 | 227 |
| MARKET CAP (cr) | 1,47,145 | 27,843 | 17,847 | 18,907 | 13,559 |
| PE RATIO | 10 | 6 | 6 | 6 | 6 |
Looking at the PE , PSU banks are much cheaper than private sector banks. In PSU banks, SBI leads followed by Canara Bank. Not surprisingly, PNB has the lowest PE in these top five. Private sector banks are quoted at a much higher valuation and HDFC Bank is way ahead of all, which to some extent means, it has capped gains for the future. Axis Bank is the lowest while Yes Bank and ICICI Bank are in the good and affordable range.
Clearly, if banking sector is your preference, then private sector stocks should be the first choice and within it, Yes Bank followed by ICICI Bank looks good while one can continue to hold HDFC Bank and Axis and every dip could be an opportunity to accumulate. In PSU Banks wait for the air to get cleared and things to settle. No point banking on them now when you could get an opportunity later.