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Is it time to buy banking stocks after the recent carnage?

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Is it time to buy banking stocks after the recent carnage?
The Bank Nifty on Thursday dropped to its lowest level since Oct 2013. A level of around Rs 970 for the ICICI Bank is something we have not seen since Sept 2013.
 

Investors are mercilessly pounding banking stocks with shares of PSU Banks being badly battered. For example, at around Rs 54, IDBI Bank is very close to its 52-week low. Similarly, for Union Bank at Rs 103.

The reasons for the collateral damage in banking stocks are many. First, and the prime reason for the recent drop in stock prices from the sector is the RBI's decision to hike repo rates. These are rates at which the RBI lends to banks and any hike in these rates is not good news for banks, who have to pass the same onto customers and face margin squeeze.

It's been quite a few quarters since the non performing asset issue at banks continues to linger. It remains sticky, though quite a few banks have seen some improvement in their asset quality. Public sector banks, particularly the larger ones like Punjab National Bank and State Bank of India have simply been unable to control the deterioration in asset quality. However, a few private sector banks like Yes Bank have shown very encouraging results.

Is it time to be optimistic?

The banking sector maybe facing difficult times, but, stocks from the sector have been hit mercilessly, making their valuations very reasonable. For example, Canara Bank is quoting at a price to book value of just 0.40 times, with a dividend yield of more than 5 per cent. Similarly, Syndicate Bank is quoting at a price to earnings multiple of just under 3 times. Markets cannot keep ignoring the absymally low levels at which banking stocks are quoting.

Even a good private sector banking stocks like Yes Bank is trading at just under 8 time its projected EPS of Rs 40. To read more on what is EPS click here

 

There's no doubt that at some stage this year, the economy will rebound and when that happens, you are unlikely to get banking stocks at these levels. The General Elections are just 3 months away and if we have a stable government at the centre, be rest assured that the first set of stocks to bounce back would be the banking stocks.

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