Increasing investor interest is seen in banking stocks in the past two quarters as can be seen from the steep growth in Bombay Stock Exchange (BSE Bankex), Bank Nifty in recent times. On July 31. Monday, Bank Nifty grew 3.5%, the biggest single day gain the past six months.
With the Reserve Bank of India (RBI) liquidity easing measures, fall in interest rate on deposits and place with State Bank of India (SBI) setting the ball rolling on April 1 by merging five associate banks, more merger and acquisitions can happen in the banking sector especially in the public sector.
India’s economic growth is presenting a mixed picture with falling inflation, fall in industrial production, infrastructure growth and introduction of Goods and Services Tax (GST) to initially curb sales and distribution of goods in the first two quarters.
Despite some of the structural issues facing the sector, investors can book profits in view of the positive sentiments prevailing in the short to medium term Here is a look at the prospects of a select public sector and private sector players in banking:-
#State Bank of India (BSE: 500112, NSE: SBIN) Category: Large Cap
State Bank of India is a premier public sector bank in the country established in 1955 while its origins can be traced back to the first decade of the 19th century with the establishment of Bank of Calcutta on 2 June, 1806.
Recently, the bank was in the news for the merger of five of its associate banks to make it a global lender with assets of Rs 32 trillion and among 50 major banks in the world. SBI has reduced its interest on savings deposits by 50 basis points to 3.5%. This will be applicable for its 9.4 lakh crore deposits and reduce its cost of borrowing.
In March quarter, the financial results were encouraging with net profit rising 122.72% to Rs 2814.82 cr. Earnings Per Share (EPS) has risen sharply to 3.55 while income on investment has risen 22.70% to Rs 13,507.03 cr.
On a returns perspective, 13.06% on monthly, 6.55% quarterly and 14.05% semi-annual is above industry average. At 5.07% cost of funds ratio, 64.70 Interest Earned and Interest Expended, it scores better than peers but net profit margin growth is not encouraging. Promoters hold 62.22% stake.
It is currently trading at a price earnings multiple of 23.15 indicative of moderate pricing by market.
On technical charts, Relative Strength Index (RSI) of 69.56 denotes bullish trend moving towards over bought territory while MACD line is above signal line showing buying opportunity. Average Directional Index (ADX) of 37.84 is indicative of uptrend. It is currently trading above 50 DMA of 287.83. Support is seen at 294, 291 levels.
Target: 340 Duration: 6 weeks Strategy: Hold/Buy
HDFC Bank was incorporated in 1994 as a banking company. It has a branch network of 4727, 12, 220 ATMS in 2666 towns. This new generation bank has launched a new all-digital initiative, ‘India’s No.1 Bank’ campaign.
The net profit for June quarter has risen 20.22% on annualised basis to Rs 3893.84 cr while earnings per share has risen sharply to 15. Gross Non-Performing Assets (NPA) has risen 19.23% to 1.24. Income on investment rose 2.20% to Rs 3892.97 cr.
On a returns perspective, 7.74% monthly, 15.08% quarterly and 36% on semi-annual basis is on par with private players in the banking industry. It is trading at a PE of 24.46 which is indicative of moderate pricing by market.
On technical charts, RSI of 76.57 is indicative of bullish-oversold position. MACD line is above signal line showing buying opportunity while ADX of 57 indicates strong uptrend. Prices are trending much above the 50 DMA of 1674.69. Support is seen at 1679.25.
Canara Bank was established 111 years ago and now has a strong branch network of 6089 and 10559 ATMs. It has overseas operations in Dubai, Hong Kong, Leicester, UK, Manama, Johannesburg. It sustains the core values of its founder Shri AmmembalSubba Rao Pai.
The bank was in the news recently regarding its move to acquire two public sector banks-Vijaya Bank and Dena Bank. Canara is fourth in market capitalisation behind SBI, Bank of Baroda and Punjab National Bank.
It posted a net profit growth of 9.89% at Rs 251.60 cr while EPS has fallen to 4.21. Net NPA has risen to 7.09. Income from investments have risen 9.11% to Rs 2733.44 cr. Total expenditure has risen 27.68 % to Rs 4553.125 cr. Trading at a PE of 24, it is moderately priced by the market.
On technical charts, 55.51 is neutral to bullish, while MACD line has witnessed a bullish crossover suggestive of buying opportunity in the stock. ADX of 15 is indicative of range bound trading.Prices are trending above the 50 DMA of 352.74. Support levels: 349. 329 levels.
Target: 390 Duration: 3 weeks Strategy: Hold/Buy
#Yes Bank Ltd (BSE:532643 NSE:YESBANK) Category: Large Cap
Yes Bank established in 2003 is India’s fastest growing private sector bank ranked fourth in this sector. It has set a vision to become the finest quality bank in India by 2020. Promoters hold 20 % stake while foreign institutions hold 45.76% stake.
In June quarter, the net profit rose 31.94% to Rs 965.52 cr, EPS rose sharply to 20.65. It is trading at a PE of 23.46 which suggests moderate pricing by the market. It has been actively traded in the bourses as can be gauged from its trading volumes having witnessed over Rs 70 cr in early trades on Tuesday.
RSI of 80 denotes bullish over bought position, MACD line is above signal line denoting buying opportunity while ADX of 44 shows uptrend and likely decline on profit booking. It is trading above the 50 DMA of 1519.71.
Target:2000 Duration: 3 weeks Strategy: Hold
Banking stocks are witnessing an uptrend thanks to lowering of interest rates and reduced cost of borrowing with SBI setting the trend. However, the underlying structural issues need to be resolved before the financial sector can achieve healthy balance sheets. Indian banks have bad debts to the extent of $191 bn. The Non-Performing Assets at Rs 6 lakh crore growing at an alarming pace and the need for maintaining capital adequacy ratio (CAR) may lead to more mergers and acquisitions. More state-owned banks may merge to form larger entities to proportionately match the size of SBI. What is worrying for the short to medium term is the fall in infrastructure growth, stagnant or shrinking private sector investment and vulnerability of the banking system in general.