Stocks of banks may remain slightly weak, with investors eyeing cues from broad market. The overall mood remains negative for the banking sector as asset quality is set to face pressure in weak economic environment. Any positive cues from the government or broad market are the only key positives that can lead to a reversal in trend for bank stocks. Purchase of stocks of private banks over state-owned banks, which have been facing stress on asset quality and profitability. Out performance by private sector banks on operational performance and asset quality issues are the prime reasons for the growing valuation gap between private and state-owned banks.
While the private sector banks continue to command premium valuation, the PSU (public sector undertaking) banks continue to languish at lower multiple primarily due to asset quality issues. Our top picks in private banking space include - Axis Bank, YES Bank, J&K Bank, ING Vysya Bank, while, we prefer Bank of Baroda and Indian Bank from public sector banks. Any re-rating or revaluing of state-owned banks was likely only after they showed a sustained improvement in asset quality and clear signs of recovery in macroeconomic conditions. Bank is currently maintaining a cautious stance, as it was facing stress in construction equipment, commercial vehicle segment and large corporate segment. Limited loan exposure towards stressed sectors is the only saving grace for Bank of Baroda as tepid loan book growth, rising loan delinquency and a 37% CAGR likely in its restructured loan book over 2012-14 (Apr-Mar) remain key areas of concern.
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