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Best stocks to buy now are banking stocks

This article was posted on Apr 22, 2009 and is filed under Press Releases

Amid easing of liquidity, low bond yields and expectations of long term economic revival, banking stocks are seen as the best bet for investment - both in medium term and long term.

Banking sector is expected to outperform the market giving an on an average return of 20 per cent, according to analysts.

“With softer monetary policies and consequent reduction in bank lending rates and benchmark G-Sec rates, action would shift from core income to treasury and asset quality,” said Amitabh Chakraborty, president (equities), Religare Securities.

Added Chakraborty, “Slower credit growth coupled with reduced benchmark prime lending rate (BPLR) will keep NII subdued. However, fall in benchmark rate will result in reversal of mark-to-market provision and trading gain opportunities.”

Checkout: Top 10 Banking Stocks for best investment

BPLR is a short-term interest rate quoted by a commercial bank as an indication of the rate being charged on loans to its best commercial customers.

With capital adequacy ratio of 9 per cent and tier-I capital of 6 per cent, India banks (both PSUs and private sector) stand firm in the face of worsening global banking scenario.

Said Manish Sonthalia, vice president-equity strategy, Motilal Oswal, “Indian banks are 5 times more risk averse than US banks wherein capital adequacy ratio is merely around 2% as against standard 9% in India. The debt to equity ratio of Indian banks is 10 times more than US banks.”

With a healthy 7 per cent GDP growth, India still stands strong in terms of economic development, for which banks are the major drivers for funds. Among Indian banks, PSU banks are the most preferred to park money. “Because of the higher investment of 27- 28% in SLR securities, the PSU banks are a better investment bet as against private banks (25% in SLR),” states a Religare research report.

Furthermore, because of more retail loan disbursement, chances of defaults are relatively higher for private banks.

However, net non-performing asset (NPA) levels for both PSU and private banks ranges between 0.7% and 1%. “Whatever may be the current NPA level; those are manageable and banks are making enough provisions for that. NPA is no threat for Indian banks,” added Motilal’s Sonthalia.

Top picks from PSU banks are SBI, Oriental bank, Indian Bank, Andhra Bank, Bank of Baroda, Federal Bank etc while ICICI, HDFC, Axis are the banks which rule the roost in private segment.

According to the analysts, any fresh ‘buy’ on these bank stocks can attract returns of upto 15-20% in a year. Meanwhile, market slowdown does not seem to have played any spoilsport for banks’ financial performance. Experts are of the opinion that PSU banks are expected to post a hike in their bottom line on YoY basis.

Source: Economic Times

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