Market watch: Bank on them
While infrastructure may have been the dominant theme for this leg of the rally, the one sector that has lifted investor sentiment more than any other is banking, writes Udayan Mukherjee.
Big sectors lead big moves. While infrastructure may have been the dominant theme for this leg of the rally, the one sector that has lifted investor sentiment more than any other is banking.
In a sense, the return of the banking sector is an endorsement of the key swing factor for this market--the lifting of the interest rate overhang.
In just one month, bellwether State Bank of India has rallied 26 per cent, leading the banking index up 15 per cent. Rallies in the smaller state-owned banks have been spectacular.
In this period, Bank of India is up 50 per cent, Union Bank 40 per cent, Corporation Bank 30 per cent and Canara Bank 25 per cent. Many of them like United Commercial Bank, Bank of Baroda, Union Bank and Bank of India have even gone to post new highs.
A lot of investors who were stuck in these bank stocks must be a relieved lot. Yet, now a new set of investors must be wondering how much higher these stocks can go from here.
Bank stock valuations had been severely compressed when interest rates were shooting up; now a large part of that valuation contraction has been unwound. The easy money, in a sense, has been made.
Having got back to the old highs, growth and valuations have to be reassessed. In a relative sense Punjab National Bank, Oriental Bank of Commerce and Andhra Bank have been laggards.
They have moved in the same direction but not as much. Also, despite the run-up, some of these banks still appear inexpensive. Many of them like Vijaya Bank, Corporation Bank, United Commercial Bank, Allahabad Bank and Bank of Baroda trade in a price to adjusted book (P/ABV) multiple of 1.1-1.3.
Even if one debates the commodity nature of their banking business, these valuations are cheap. If interest rates have indeed topped out, then these valuations can certainly head a notch higher. Maybe not without a pause as all these stocks have run up a lot. A bit of profit taking is entirely possible.
However, one needs to monitor this space for relative valuations all the time. Because of their superior business profile, private banks get far better valuations from investors.
They trade in a broad P/ABV range of 2.5-6 times. Which is what makes the state-owned banks seem attractive. But they outperform and inch closer to the multiple of 2 times the book, it may call for some reallocation again. Most state-owned banks are like commodities. In a solid sector environment they will generate returns.
Good returns. As they have in the last one month. But the ones with more robust and diversified business models are the classier private sector banks. They may pause from time to time to let valuations catch up but still seem like secular growth stories to bet on.
(The writer is Executive Editor, CNBC-TV 18)
