The Hindu Business Line : Bankable bets

MOST old private bank stocks look pretty attractive from a dividend yield perspective. However, the higher dividend yield is itself a sign of investor apathy for banking stocks, which is not without reason though.

The large NPA overhang is the reason. Importantly, as a portion of the net NPAs will have to be written-off (recoveries are almost impossible in the case of defaulting NBFCs), there is the possibility of the dividend declared declining. In other words, the market expects the dividend yield to be lower in future. On the other hand, if there are changes in fundamental factors, which reduce the adverse impact of NPAs, then there will be re-rating of the stocks. Overall, therefore, the risks have to be balanced with the expected reward. In terms of suitability, conservative investors should avoid this segment.

Among the lot, stocks such as Dhanalakshmi Bank and Lakshmi Vilas Bank can be avoided. Their dividend yield is high, but so are their NPAs. Investors in these banks can consider switching to other stocks. They can also exit from the Vysya Bank stock. The dividend yield is low and ING has already acquired a substantial stake. The prospect of further price action in this counter appears bleak.

As regards Karnataka Bank and Karur Vysya Bank, investors can stay put for now. In the case of KVB, the dividend yield is quite low and it is also possible that after the allotment of bonus and rights shares there may be selling pressure as the amount of floating stock will rise sharply. These two factors suggest near-term bearishness. However, KVB appears to be a possible takeover candidate. Though KVB has stated that no deals are on the cards now, the market is likely to attach a premium to the stock's valuation. This will be the case especially if the bank is able to manage its NPAs better. So, investors can hold on for now while avoiding fresh investments.

In the case of Karnataka Bank, the valuations — with a dividend yield of 5.3 per cent and a relatively lower NPA — are attractive. Fresh investments can be considered at declines, especially if the dividend yield rises and NPA management is good.

The two largest banks in this segment are Jammu & Kashmir Bank and Federal Bank. In the case of the former, the valuations are attractive. Its NPA record is now among the best in the banking industry as a whole. The growth record is also impressive. The dividend yield, too, is attractive. Institutional interest in the counter is also increasing. Investors can contemplate fresh investments in the stock.

As for Federal Bank, NPAs are a problem; the bank is, however, making significant progress in containing the fallout. The dividend yield is also not that attractive. Further, though it is the second largest bank, takeover attempts are unlikely since ICICI Bank already holds a 22 per cent stake; takeover premium is also unlikely. Investors can, therefore, hold for now and avoid fresh exposures.

As regards City Union Bank and South Indian Bank, the dividend yields are quite attractive. The South Indian Bank stock is especially attractive. ICICI holds a 12 per cent stake in it. Small investments can be considered in both the stocks for now. Higher exposures can be considered if its NPA management improves.

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