Banking Sector - Book Profits

Overseas investors seem to be on a selling spree when it comes to the Indian banking stocks, as they have pared their holdings in at least 28 public and private sector banks of the country in the past few months.
Various foreign investors have together sold banking stocks worth an estimated Rs 10,000 crore (over USD 2 billion) in about four-and-a-half months since October 2011.

While foreign investors have sold shares of at least 28 Indian banks, they have purchased fresh shares of only nine banking stocks during this period. The value of fresh banking shares purchased during this period is also much less at just about Rs 600 crore, as per an analysis of shareholding pattern and open-market transaction data available with stock exchanges.

The banks where foreign investors have pared their holdings include private players like ICICI Bank, Axis Bank, Kotak Mahindra Bank, Yes Bank and DCB, as also public sector giants like SBI and Punjab National Bank. Those having seen an increase in the holding of overseas investors include HDFC Bank, South Indian Bank and IDBI Bank.

In one of the biggest share-sale transaction in the banking sector during this period, a unit of Singapore government's investment arm Temasek Holdings sold shares worth about Rs 1,500 crore in ICICI Bank on
Market analysts said the shares could have been sold to book profit after a sharp rally of about one-third in ICICI Bank shares since the beginning of 2012.

Indian banking and financial sector stocks have witnessed many share transactions in the recent past, given a sharp surge in their value since the beginning of 2012.   While US-based Carlyle group sold shares worth about Rs 1,350 crore in HDFC on February 1, Warburg Pincus sold shares accounting for about 2.4 per cent stake in Kotak Mahindra Bank for about Rs 800 crore on the same day.

Besides, the shareholding pattern data for the October- December 2011 quarter shows that FIIs (Foreign Institutional Investors) lowered their holding in 26 banks.  These included ICICI Bank, SBI, Axis Bank, DCB, Yes Bank, Allahabad Bank, Indian Bank, Corporation Bank, Bank of Baroda, Canara Bank, Dhanlaxmi Bank, Karnataka Bank, among others.

In fact, the banking sector witnessed the highest level of share sale by FIIs during that quarter. Also, a few like PNB, SBI, Syndicate Bank, Allahabad Bank and Central Bank have seen their FII holdings declining for four consecutive quarters now.  On the other hand, the FII holding increased during the last quarter of calendar year 2011 in banks like South Indian Bank, Bank of India, City Union Bank, IDBI Bank, Indian Overseas Bank, Federal Bank, Andhra Bank, HDFC Bank and ING Vysya Bank.

Our Recommendation :
With  most of the banking shares clocking decent gains of 30-50% gains, it is time to book profits and stay away from the sector as it faces stiff resistance at higher levels.  Long term investors can however utilize steep falls to add banking scrips to their portfolio.



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Bank of India - Buy on declines

Decent valuations apart, improvement in operational parameters could prop Bank of India.

Bank of India is currently in the analysts’ favoured list even though its valuations look attractive. Its loan growth, in tandem with the industry average, has grown around 18 per cent. To maintain this growth level, the yield on advances has suffered. It declined 156 basis points despite cost of funds falling 128 basis points. The current account savings account (CASA) ratio, an indication of low-cost funds, increased from 30.7 per cent to 31.75 per cent on a year-on-year basis.

However, this did not support net interest margins (NIMs), which declined 41 basis points to 2.57 per cent. The cost to income ratio, a second barometer of efficient operations, jumped 742 basis points to 43.96 per cent. Net interest income grew marginally by 8 per cent to Rs 1,552 crore and other income declined 8 per cent due to lower treasury profit, in line with other banks.

But, operating expenses were up 23 per cent due to branch expenses and higher employee cost. All this led to a decline of 9 per cent in operating profit to Rs 1,275 crore. The bank disappointed heavily on the non-performing assets (NPAs) front. In absolute terms, gross NPAs doubled while net NPAs quadrupled. Thus, net profit declined heavily by 47 per cent to Rs 428 crore as provisions for NPAs doubled.

In contrast to expectations, the bank’s foreign operations, about 17 per cent of total business, fared better than Indian operations. While loan growth has been higher at 27 per cent, yield on advances and NIMs have improved 174 basis points and 38 basis points, respectively, though cost of funds has inched up 76 basis points. The asset quality has also been better as gross NPAs (in percentage terms) have slipped marginally by 15 basis points while net NPAs have declined five basis points.

The weak performance of four quarters led the bank to a disappointing end of FY10 compared to FY09. While net interest income inched up 5 per cent, operating profit and net profit declined about 14 per cent and 42 per cent, respectively, due to higher operating expenses and almost doubling of provisions. Analysts look for better operational efficiency from the bank. Any leverage here would improve its valuations, the share trades at around 1.3 times and 1.1 times its estimated adjusted book value for FY11 and FY12.

Source : BS

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Technical Analysis - Bank of India

Bank of India (Rs 241.3): This stock too has been in the throes of a structural bear market since the beginning of 2008. But it has twice bounced from the support at Rs 200 in 2008. Bank of India recently made a trough at Rs 179 and a short-term up-trend is currently in progress. The area between Rs 170 and Rs 200 is a key long-term support for the stock and long-term investors can hold on as long as it trades above Rs 170.

Though a race to the bull-market peak at Rs 465 would not be possible over the next two years, the stock can rally to Rs 290 or Rs 360 in that period. Key short-term resistance for this stock is at Rs 260.