The Reserve Bank of India on Tuesday cut interest rates, as was largely expected. The repo rate, or the rate at which the RBI lends money to banks has now been slashed to 6.25 per cent. It does not mean that if the RBI cuts interest rates, banks will be forced to cut rates.
Banks will examine their own asset liability match, before deciding on interest rates. We believe that certain banking shares are good picks. Here is why a few of them we have mentioned can be accumulated on declines.
Interest rates are falling
The RBI was clear that the Monetary Policy Committee was continuing an accommodative policy. What this means is that there is scope for interest rates to fall. When interest rates fall, it is likely to benefit banks. Even if we see another 50 basis points, we could see vast improvement in the financial performance of banks. This is perhaps a good time to buy banking stocks from a 2-3 year perspective. It is highly likely that we may see stocks almost gain 15-20 per cent every year.
NPAs are falling
Another thing is clear that non performing assets are peaking. We do not see significant deterioration in the asset quality of banks. In fact, there is only scope for the asset quality to improve. Even if we see a slight improvement in the asset quality, we might see a significant spike in the share price. Also, for some government owned banks, the capital infusion and the benefits arising thereof could be beneficial.
If you see most of the larger private sector banks like IndusInd Bank and HDFC Bank, you realize that they are very expensive. On the other hand a good franchisee like Federal Bank is available at reasonable valuations.
The company reported a decent earnings with net profits rising to Rs 167 crores for the quarter ending June, 2016. From here on we believe profits will only be better. The bank can report an EPS of Rs 7 for the full year 2016-17.
At the current market price of Rs 75, the stock trades at around 11 times. At the moment you do not get a private sector bank at a p/e of just 11 times. The gross non performing assets of the bank is also not bad at around 2.92. This should improve dramatically going forward. A good pick at the current level of Rs 75.
We like Syndicate Bank, because it is among the better managed government owned banks in terms of NPAS.
The gross non performing assets were placed at 7.53, for the quarter ending June 30, 2016. We believe that from here on, the asset quality cannot get worse.
The share price at Rs 75, has factored the large scale NPA.
The government's ongoing focus on improving the non performing asset is likely to bear fruit. We believe that Syndicate Bank has the potential to make good money for investors. Not a bad bet at the current levels at Rs 75.
RBL Bank only recently came out with a public issue at an IPO price of Rs 225.
The bank compares well with some other private sector banks, in terms non performing assets. In fact, its gross non performing assets at 0.98% and net non performing assets at 0.59% are very much comparable to that of new age private sector banks.
We believe the bank can report an EPS of Rs 18 for FY 2017-18, which should take the price to at least Rs 360 from the current levels of Rs 297.
Wait for the stock to dip near Rs 275 levels, before buying.
Andhra Bank is one government bank that has not shown losses in the last few quarters, like most other government owned banks. In fact, it has been managing to post net profits, quarter on quarter.
In fact, the bank is among the few government owned banks that managed to declare a dividend.
The gross non performing assets has surged to 10.30 in the quarter ending June 30, 2016. We believe that the level of gross non performing asset for the bank may have peaked. The shares are not a bad bet at the current levels of Rs 58. Buy, if you are prepared to hold the shares for at least two years.
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