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Thursday, November 15, 2012

Private sector lenders such as HDFC Bank, ICICI Bank emerge as investors' favourite due to lower NPAs

After the September quarter results, private sector lenders such HDFC Bank and ICICI Bank have emerged as clear investors' favourite as public sector banks reel under the stress of rising bad loans.

The sluggishness in the economy is set to hurt all lenders, but state-run banks are likely to suffer more because of their exposure to infrastructure, which is expected to account for a big chunk of their NPAs. "PSU banks' valuations are cheap, but it is hard to say which bank will disappoint more on NPAs," said Abhijit Gulanikar, chief investment officer at SBI Life. "At the moment, private sector NPAs are under control."

The Q2 earnings show that bad loans at the top-five public sector banks rose by 80% against the 10% jump for private sector banks. "The private sector will continue to be preferred over the public sector as there is no sign of a trend reversal in the near term," said Vaibhav Agarwal, analyst at Angel Broking. "There is a huge divergence in net NPA and provisioning for private and public sector banks."

The price-to-book value of HDFC Bank is 5.05%, ICICI Bank is 2.02% and Axis Bank is 2.27%. In comparison, the P/BV at public sector banks is much lower - it is 1.72% for SBI, 1.14% for Bank of Baroda, and 0.99% for PNB. The price-to-book value is the ratio of market value of the equity to the book value of the equity. A higher P/BV means the company's shares are over priced.

Public sector banks would have posted a flat or lower growth in profits if they had made provisions for the increase in net NPA, said Agarwal. "A spike in NPAs is not unusual in the given economic environment," said MD Mallya, chairman and managing director of Bank of Baroda. "In the coming quarters, we expect revival and recovery to be better in the accounts that have gone bad."

Most problems for state-run banks arise from their high exposure to infrastructure such as power and roads, where projects are stuck at various stages due to administrative obstacles.


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