We like PSU and small private sector banks: ICICI Direct

Pankaj Pandey, Head of Research, ICICI Direct in a chat with ET Now talks about the banking sector stocks.

You are bullish on banking as well. Bank of India, Karnataka Bank, a couple of stocks that you like. What’s the rationale here?

See, we like PSU banks and small private sector banks. For example, we like Bank of India, especially for the reason that this bank in terms of bond portfolio, it has got about 23% of AFS book. Earlier if the bond yields would have been more than 8% odd, then that would have been a bit detrimental in terms of higher provisioning and mark-to-market losses since you would not expect that to happen, so this is one positive for the banks.

We also expect that the NIMs for the bank to improve to about 2.9% odd compared to about 2.6% odd on the back of re-pricing of bulk deposits to the tune of about 15000 crores odd and in terms of valuation, this bank trades at about 25% discount to some of its comparable peers on the PSU banking space and we feel that going forward its return ratios as well as ROEs would improve going forward and that is why we are positive on this particular counter.

Another stock, which we like is Karnataka Bank. Now this bank did not do well in FY10 and what we are expecting is that it will return to its FY09 profitability in FY11 and as a result of that, earlier this bank was delivering ROEs in the range of 18% odd, which had come down to about 10-11% in nine months last year and we would expect that to improve to about 14% odd and in terms of valuation, even if it give one time forward book value, we get a valuation of about 145 on the counter.