The Hindu Business Line : Indian banks are cheaper, says Mark Mobius

If you are looking for large capitalised banks with good liquidity, it is really in India then China, Brazil and on the margin maybe Turkey or South Africa, said emerging markets guru, Dr Mark Mobius at an international conference in Mumbai recently.

"In some cases, Indian banks are cheaper. However, the limitation and the reason why we don't hold more is due to the foreign limit that we are running up against. That is one of the reasons Chinese banks have been quite popular," he said, referring to the recent big Chinese IPO, ICBC.

Dr Mobius' statement just reiterates the popular sentiment that there is good appetite for bank stocks and that there is a need to increase limit. However, in most bank counters (particularly PSU banks), FII investment has touched the upper limit.

As per RBI data, Public Sector banks in which 20 per cent limit has been reached and no further investments are permitted include Bank of Baroda, Oriental Bank of Commerce, Punjab National Bank, State Bank of India and Union Bank of India.

Public Sector banks in which 18 per cent caution limit has been reached and further purchases by FIIs/NRIs/PIOs are allowed only with prior permission of RBI are Andhra Bank, Canara Bank, Indian Overseas Bank and Vijaya Bank.

Marketmen, however, believe that it is highly unlikely that there will be any move by the Government in the near term towards increasing FII limit in banks.

"As such, at current levels while normal growth will happen in line with the broad market, there will be no re-rating in terms of multiples," said a senior analyst with a leading domestic brokerage.

According to Mr Sandeep Shenoy, strategist with Pioneer Intermediaries, the capex cycle followed by strong buoyancy in consumer demand in real estate is driving offtake by banks. This is a good potent recipe for upward revision of bank stocks.

"However, value unlocking will only take place where M&As and consolidation and broader participation by overseas investors is allowed," he added.

Analysts maintain that today pricing power is back with banks. According to Edelweiss Research, even after 9 per cent out-performance over the last six months, the sector has under performed the broader market by 21 per cent in the past one year. Recently allowed hybrid capital instruments are expected to add around 35 per cent to historical valuations.

"We believe demand for credit would remain strong both from corporate and retail sector despite rising interest rates. High deposit accretion and lower incremental CD ratio (67 percent) adds to our comfort on the funding ability of banks. We expect banks to sustain earnings momentum during Q3FY07E with stable margins."

The stock of Andhra Bank ended at Rs 92.40 on the BSE, while Canara Bank closed at Rs 289.90, IOB at Rs 111.55 and Vijaya Bank at Rs 53.10 on the BSE.

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