Look at how mood changes so dramatically…yesterday HDFC Bank and Kotak were down 4-5% and PSU banks up 25-50% and the emerging theme was sector rotation…moving away from private sector banks and NBFCs to PSU banks…Overnight brokerages haven’t hesitated to dramatically increase multiples for PSU banks without any changes to earnings or ROE…what kind of an upgrade is that where you don’t change the fundamentals much but simply increase multiples which have no bearing to the ROE?

Looks like a Keynesian beauty contest is going on…for those who don’t know what it is refer here…

Think about it – Has one announcement changed the landscape for private sector banks?

HDFC Bank and Kotak have reported 20%+ loan growth, 20%+ earnings growth, stable asset quality – they are miles ahead of PSU banks in digital banking, quality of management etc…

I am just wondering how can one be so myopic…The average age of workforce in PSU banks is 50+ almost double that of these private sector banks…Trade unions CANNOT BE dismantled, consolidation so far has only been in papers and remains a distant dream as there are enormous challenges in consolidation and recapitalization only will further delay it – how are you going to bring about reforms in them? Merely bailing out doesn’t serve the purpose…

Anyway let’s keep this simple and ask some pertinent questions…

Which banks have higher degree of earnings visibility and growth?

I can bet that HDFC Bank and Kotak Bank can deliver 20% EPS growth for the next 3 years…Do you any visibility of earnings growth for PSU banks especially in the context of massive equity dilution impending? Forget about EPS upgrades, there will be downgrades on the back for further equity dilution and write-offs…

Or it doesn’t matter now as I am not supposed to look at fundamentals…I am only supposed to HOPE, HOPE AND HOPE any buy them?
Is there a risk to 20% loan growth for Kotak or HDFC Bank?

To begin with, when PSU banks get money, they will take the easier route and lend to corporate, they don’t have the wherewithal or the mindset to do retail lending…so retail book which forms more than 50% of the book for these banks will continue to do well…
And at the margin, if there is return of some risk appetite and resumption of corporate lending by them, won’t the entire market pie expand?

What am I getting wrong here?
Well the relative-value game trade here…PSU banks were at a much sharper discount to the private sector banks and that gap getting bridged justifies the movement or rotation from privates to PSU banks…So it’s all a game of relative value here…
Understood…But 25-50% rally isn’t enough? I mean there will be massive earnings cut in PSU banks for the next 12 to 18 months, asset quality will further deteriorate – despite such poor trajectory, stocks are up and adequately pricing in the recap news…

I still strongly feel private sector banks’ fundamentals aren’t going to weaken a bit…they will still outshine the PSUs by a big margin and if there is some merit to fundamentals, then ask all those people who have upgraded – when do they see ROE of PSU banks being greater than cost of capital to equity (which is around 11-12%)…If NOT why should I pay them above book?
Or I am living in an Utopian world and in real world, these things don’t matter any longer?
I have seen how recapitalization happened in 1990s in a similar way and how these PSU banks are post that recapitalization through recap bonds…”Those who do not learn history are doomed to repeat it”…

You are not going to get many opportunities in life where you see the likes of HDFC Bank and Kotak correcting or under performing…Think about it!

Source – Web

LEAVE A REPLY

Please enter your comment!
Please enter your name here