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Indian Banks Margins set to Collapse – SELL

May 2, 2011

In a faster than expected surprise, Morgan Stanley pushed the report on Indian Banks saying that Margins are headed for a Collapse and Downgraded the Indian PSU Banking Space to Underweight. Morgan expects the NIM to fall between 40-70 bps.

The pre-provision operating profit (PPOP) will drop to single digits after the 40%+ growth in F11. PSU Bank F12E multiples have moved up to 11x P/E and 1.6x P/BV – these will likely be under pressure as revenues disappoint. Slowing revenue growth and risks to asset quality are rising. Key risks to the recommendation are – if the macro outlook improves – lower inflation and hence rates.

This will affect the Markets as most of Indian Fund Managers are sitting with atleast 20% exposure to PSU Banks in their portfolio to ride the Infrastructure, Utilities and Capital Goods Boom. Long term these are good stocks to own, but for now they are in a tough spot.

SBI has been downgraded to a price target of Rs 2400 so are PNB, BOB and BOI with price targets of Rs 1070, 800 and 400 respectively. Their EPS estimates are reduced by ~5% and hence the downgraded in share price targets. This is a significant discount to ruling market prices and the sector may be in trouble over the next 6 to 12 months.

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