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Caution on Indian Banks – Morgan Stanley

June 26, 2008

According to Morgan Stanley, India has the worst macro among Asian countries right now – implying significant probability of tightening. This move is clearly bad for banks – the question is how bad. In Morgan’s view, it’s very bad – don’t be surprised if banks correct by another 25-30% from current levels, even after they have declined 30-50% YTD.

Banks earnings will be hit by slower volume growth, weaker NIMs and deterioration in credit quality. The hike in rates will impact individuals and as well as corporate profitability, which will probably cause further deterioration in asset quality. PSU Banks will book MTM losses on their bond portfolio, given that 10-year G-sec yield that have already moved around 60-70bps since Mar-08 and will increase further given RBI’s latest move.

Indian Banks and their forward P/E [FY-2009 E] is recorded as below.
HDFC 23.6
Kotak Bank 21.5
HDFC Bank 19.9
Reliance Capital 19.9
Axis Bank 18.8
ICICI Bank 16.7
IDFC 16.3
SBI 11.9
IDBI 7.6
PNB 5.8
BOI 5.6
Corp Bank 4.7
Bank Of Baroda 4.6
Canara Bank3.8
OBC 3.1

Dalal Street Opinion: One can accumulate PSU Banks with really long term horizon [5-10 years] as they are profit making and dividend declaring companies. Their full vaule will be unlocked within the next decade.

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