Executive Editor, CNBC-TV18Indian private sector bank stocks, one of the most venerated lots in this four-year bull run, have been trashed in the last one month. The largest one, ICICI Bank, has lost half its market value and smaller ones like Yes, DCB and Centurion have halved as well. Kotak Mahindra, perhaps on account of its linkages with the capital market, has suffered the most, it is down 60 per cent. The two that have outperformed are HDFC Bank and Axis, but both are down nearly 40 per cent apiece.
ICICI Bank's recent mark-to-market (MTM) disclosure has raised fears that similar skeletons will start tumbling out of the closets of most private banks. Morgan Stanley, in a recent report, highlights these fears. It says private banks will face MTM losses, maybe even defaults from small and medium enterprises and revenues and profits decline as the shrinking forex business accounts for between 12 and 18 per cent of profit before tax (PBT) of leading private banks. You can debate whether these fears are overblown, but the fact is that it is all out in the open. These days it takes only a shadow of a doubt to derate a stock. People sell first, then ask questions.
My own feeling is that some of these fears are legitimate. I suspect there will be some bad news from these banks over the next few weeks, markets will overreact and punish them more severely than they deserve and that will present a buying opportunity. Valuations have corrected significantly. ICICI Bank is at a price to book (P/B) ratio of 1.5, Yes Bank and DCB are at around 2 times book, Kotak is at 2.5 and the most expensive ones HDFC Bank and Axis are about 3 times. If on some bad news or market conditions, HDFC Bank or Axis slip to about 2.5 times book, say, HDFC Bank to Rs 950 or Axis to Rs 625-650, valuations would look very tempting. Kotak may underperform for some time on account of the capital market hangover, but there too it may be a matter of timing an entry. Maybe 2 times book would be fair there for the higher risk taken, say, close to Rs 450. ICICI Bank is a more complex beast with many parts to the puzzle. It looks cheap already but maybe one waits to see if there is more bad news and then starts accumulating. After this global financial turmoil is over, investors will realise these are secular growth businesses. The time to buy them is at the height of pessimism and bad news flow and that time may be arriving soon. Many of them are high quality institutions, do not let the small blemishes or the noise throw you off.