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Neha Kapoor

MUMBAI, May 6

WITH the outlook for the technology sector looking grim in the short term, the banking sector — particularly public sector banks — seems to have become the darling of the stock markets, gaining ground in every trading session.

Even so, questions are being asked on whether the current rally is just another flash-in-the-pan or if there is a long-term story at these counters?

So far, say market experts, banking stocks have been riding on positive triggers such as the Securitisation Act allowing for a clean-up on the non-performing assets (NPAs) front, cost-cutting measures and technological initiatives and dividend yield, among others.

In the long term though, the consensus is that the market will look at factors such as returning equity (as in the case of Oriental Bank of Commerce, Andhra Bank and Syndicate Bank), actual limiting or recovery of NPAs, retail thrust as well as improvement in core banking business before making a definitive call.

Mr Nitin Raheja, Fund Manager (Equities), Sun F&C Mutual Fund, said, "The trigger for the current rise in banking stocks probably began with the Securitisation Act, which gave the banks more teeth as far as NPAs are concerned, allowing them to concentrate on core business activity. This was coupled with the falling interest rate regime, moving in line with global markets, which led to a huge run-up in bond prices. Another important factor that contributed to the interest in banking stocks is the dividend yield. However, a great part of the rise has already happened. In the long term, any movement is really a function of the economic recovery and how the core business of banks picks up thereafter."

The role of treasury income, which has so far been a fairly significant contributor to overall bank income, will in all probability be toned down with the focus shifting to the bank's primary business, i.e. lending, which will be the long-term trigger, according to Mr Raheja.

Calling the present upswing in banking stocks a "case of value unlocking", Mr Suhas Naik, Fund Manager (Equities), IL&FS Mutual Fund, said, "The first round of this unlocking is already over, propelled primarily by triggers such as the bank's technological initiatives, cost-cutting measures, etc. Going forward, I believe that there are still some more triggers that could lead to an increase in valuations of these stocks. And, these include cleaning up of balance sheets, return of capital and exchange of illiquid securities that could be written off against NPAs. All these factors would help improve the adjusted book value. On the technical front, foreign institutional investors have started looking at these stocks, which means that there is a definite case for another re-rating in the sector."

On the whole, the opinion seems to be that valuations are still not stretched and stocks continue to be moderately priced. "The fundamentals of the business remain strong. In the long term even if treasury profits get reduced, it would be compensated to a large extent by an across-the-board stabilisation of margins. Also, focus on retail business will be a positive factor. Besides, if there is an economic recovery, demand for credit from the corporate sector is likely to pick up, leading to larger volumes. And there are expectations of consolidation in the sector. Taking all these parameters into account, it seems there are quite a few triggers for the sector. Overall, the valuations are still attractive in comparison to other sectors," said Ms Sejal Doshi, Senior Analyst, Tower Capital & Securities Pvt Ltd.

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