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Indian Banking Sector Upgraded by Deutsche Hong Kong

January 10, 2008

In one of the boldest new year upgrades, Deutsche Bank Securities Research has upgraded the Indian Banking Stocks. Axis, Bank of Baroda and HDFC Bank have been upgraded from HOLD to BUY. The rest are already in the BUY list. However, this time we see target prices of most banks to be 40% + from current levels, something hard to believe but only time will tell.

India stands at the cusp of a high growth scenario in domestic lending on two counts 1] RBI likely to use softening as a tool to address capital inflows leading to a rise in leverage 2] Curbs on ECBs and similar structures to increase demand from local banks. Also the value unlocking theme will be spiced up sporadically via the outright listing of AMCs and securities business.

Asset quality woes have largely been addressed in the retail lending side and robust profitability of the corporates have kept them cushioned. We foresee a pickup in corporate opportunities as momentum in projects is building up plus high prices and high volumes imply increased working capital.

Valued the core lending business on single-stage Gordon Growth for PSU banks and either 2-Stage Gordon Growth or P/E for private banks; for non-bank businesses, if present, use sum-of-parts. Here is the TOP BUY List and their Target Prices.

Axis Bank 1325
Bank of Baroda 550
HDFC Bank 2370
Kotak Mahindra Bank 1550
Centurion Bank 75
HDFC 4185
IDFC 290
ICICI Bank 1755
Karnataka Bank 320
Oriental Bank 440
Punjab National Bank 810

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