Banks - Overvalued?
Printed From: The Equity Desk
Category: Investment Ideas - Creating winning portfolios!
Forum Name: Sector talk
Forum Discription: Discussion on sectors with regard to specific matters. We will be discussing the various sectors of the economy and how they would perform. Basically a top down approach.
URL: http://www.theequitydesk.com/forum/forum_posts.asp?TID=3027
Printed Date: 06/Apr/2025 at 3:02pm
Topic: Banks - Overvalued?
Posted By: prabhakarkudva
Subject: Banks - Overvalued?
Date Posted: 10/Oct/2010 at 1:22pm
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Some thoughts on the banking sector:
It seems to me that banks are getting into the over-valued territory.Banks make money from three main sources which i feel will see pressure going forward: 1. Interest Income - The spread (NIM) that the banks have enjoyed over the past one year due to a low interest rate regime that came into effect after the big crash is due to contract.When RBI cut rates the banks kept the lending rates at more or less similar levels and cut deposits rates drastically and hence enjoyed "free profits".This probably won't continue and the NIM will come down with RBI tightening the liquidity due to inflation. The credit growth as released by RBI is nothing to talk home about.Even an optimistic 16-18% growth going forward (as opposed to an almost flat growth last year) does not warrant the optimism that we are seeing today. 2. Fee based non interest income - This is an indirect offshoot of credit growth and general actvity in the economy and will probably continue to be robust but this for most banks wont compesante for lower interest income. 3. Treasury gains - The 10 year G-Sec is pushing 8% and the treasury gains are going to turn to treasury losses as interest rates increase. All these factors indicate that profit growth is going to be muted going forward from here.Although banks like HDFC bank,Axis Bank might do relatively well from a business point of view i am worried about the PSU and other lower rung banks that have run up like anything.Something like Syndicate Bank (an average performer) which has hardly performed is up some 25-30% in the last one month.I think its better to tone down expectations and avoid exposure to mediocre banks at these levels. ------------- Take your chances and keep them in a box until a quieter time. |
Replies:
Posted By: Kabootar
Date Posted: 10/Oct/2010 at 5:25pm
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1. Wouldn't banks raise their rates as per the new PLR regime? Its not as if they will be forced to peg their rates.
2. Agree with you. 3. No idea there. The more serious possibility is of a return to financial crisis. Banks in Europe are by no means home safe. The Fed is reduced to printng dollars these days- the so called "quantitative easing" ------------- Verbal diarrhoea! A most deadly disease. |
Posted By: prabhakarkudva
Date Posted: 10/Oct/2010 at 5:38pm
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Rising rates reduce credit growth.The time to buy banks is when interest rates have peaked although it is difficult to predict the rate cycle.
Even if globally nothing goes wrong,banks are in an over-valued territory, especially the mediocre ones. ------------- Take your chances and keep them in a box until a quieter time. |
Posted By: vijaygawde
Date Posted: 10/Oct/2010 at 5:59pm
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Not only Banks, the entire financial sector seems to be overvalued. Some of the NBFC's are quoting at 4-5 times its book values. They seem to be more expensive than banks. ------------- Diversification is protection against ignorance, it makes little sense for those who know what they’re doing. |
Posted By: studentoflife
Date Posted: 10/Oct/2010 at 8:43pm
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I have a feeling,the PSU banks are going to be rerated in this Bull Run. It would be interesting to watch.
------------- First step towards learning is the realization that you do not know anything. |
Posted By: prabhakarkudva
Date Posted: 11/Oct/2010 at 6:17pm
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Student, Although it would definitely be interesting to watch,whats the thought process behind that conclusion? ------------- Take your chances and keep them in a box until a quieter time. |
Posted By: tigershark
Date Posted: 11/Oct/2010 at 10:34pm
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credit demand still continues to be strong looking at the results declared by indus ind bank.nii up 58%.
------------- understanding both the power of compound return and the difficulty getting it is the heart and soul of understanding a lot of things |
Posted By: studentoflife
Date Posted: 11/Oct/2010 at 5:23am
This is NOT a CONCLUSION.  .I never said it is.I feel there is a chance because: 1) Most profits are being generated by Non Treasury income in PSU banks. Not even fee based income.Mostly by credit growth. 2)There is too much demand for credit ,so it seems it would grow more than the growth rate in previous years.Supply demand mismatch.Corporate lending rates may increase. 3) NIM keeps fluctuating,no clear picture .For fixed deposit innovative products with varying lengths and lower rates being provided by bank.NIM can increase in the long run. If NIM decreases,credit growth will still be good enough to sustain higher than above profits.Expecting therefore higher than normal growth. 5)General trend of decreasing NPA's seems to point to obviously better and more choice available for credit with low risk rather than improvement in operational excellence. 4)Next phase of disinvestment will trigger euphoria. Disinvestment might include PSU banks. Please free to contradict. Just trying to follow Charlie Munger's advise of inverted thinking. By the way I see some very different news here :http://www.financialexpress.com/news/PSU-banks-shrug-off-rate-hike--cut-retail-loan-rates/686209/ and some very similar views here: http://www.financialexpress.com/news/bank-deposit-rates-set-to-spike-crisil/695820/ ------------- First step towards learning is the realization that you do not know anything. |
Posted By: nav_1996
Date Posted: 12/Oct/2010 at 12:35pm
| PSU banks have run-up a lot and appear expensive. But most of them trade at P/B valuation of <2 . This is not high if NPAs are low, reasonable growth, good NIM. Bamks like J&K are quoting a forward P/B of 1. So this may be a case of rerating and when re-retaing happens comparing with old valuation makes no sense as new valuations become base. e.g. Hawkins is not going to trade below PE of 10 now. Marico use to quote at PE of edible oil company but quotes at FMCG PEs now. |
Posted By: studentoflife
Date Posted: 14/Oct/2010 at 8:36am
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http://economictimes.indiatimes.com/opinion/interviews/Auto-PSU-banks-to-stay-ahead-Rajat-Rajgarhia--Motilal-Oswal-Securities/articleshow/6751130.cms
------------- First step towards learning is the realization that you do not know anything. |
Posted By: prabhakarkudva
Date Posted: 15/Oct/2010 at 3:12pm
Cannot compare a commodity business like banks to FMCG brands.Bank valuations are driven by credit growth and NIM both of which are cyclical. ------------- Take your chances and keep them in a box until a quieter time. |
Posted By: prabhakarkudva
Date Posted: 15/Oct/2010 at 3:28pm
Our research analyst friend says,"Our report states that the average credit to GDP multiplier in the last 5-10-15 years is averaging at 2.9x. Assuming that the GDP grows at 8-8.5%, you, at least, have 20% base case growth rate for the system. PSU stocks are trading at 7-9x earnings or 1.3-1.5 times price to book, which makes them very attractive. They are definitely expensive when you compare them with their historical multiples, but these stocks are still getting discovered over this cycle" So he is using historical data to justify credit growth and disregarding historical data to justify valuation. ------------- Take your chances and keep them in a box until a quieter time. |
Posted By: Mohan
Date Posted: 15/Oct/2010 at 11:43pm
Sounds to me like he is talking his ( MOST )book .  ------------- Be fearful when others are greedy and be greedy when others are fearful. |
Posted By: ppmatkari
Date Posted: 31/Oct/2010 at 12:02pm
| Performance of bank of baroda, allahabad bank, PNB, central bank has been exceptional over the last few quarters they are due for a rerating, they deserve a PE expansion. |
Posted By: prabhakarkudva
Date Posted: 25/Nov/2010 at 10:09am
I started this thread after i had a detailed discussion with my father who is an experienced banker and he told me nothing great is happening in terms of credit growth in PSU banks to justify the valuations.Although only the sentiment has changed now but there is no denying that there was froth and it is getting taken out now. ------------- Take your chances and keep them in a box until a quieter time. |
Posted By: excel_monkey
Date Posted: 25/Nov/2010 at 10:14am
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I agree banks should correct 50% from here
to provide me with an entry
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Posted By: basant
Date Posted: 25/Nov/2010 at 10:14am
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Markets are 70% emotion and 30% skill. I somehow feel that we should not argue with tape. Though if I have to bet I wil go with the HDFC group only. ------------- 'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in |
Posted By: master
Date Posted: 19/Apr/2011 at 9:22pm
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Indian banks' valuations among the most expensive in the world?
http://economictimes.indiatimes.com/opinion/interviews/indian-banks-valuations-among-most-expensive-in-world-paul-schulte-china-construction-bank-international/articleshow/8025857.cms - Link ------------- Someone’s sitting in shade today because someone planted a tree long time ago. |