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Monday, July 27, 2009

Indian Overseas Bank,Allahabad Bank,Canara Bank,Corporation Bank and UCO Bank:Future growth prospects and outlook

Banking will be one of the biggest beneficiaries, if economic growth picks up from current levels, provided interest rates remain moderate. If banking does well, which stocks to buy? While HDFC Bank and Axis Bank are obvious candidates, they are expensive. Look at the following government banks.

1)Scripscan:Indian Overseas Bank (IOB)
cmp:89
Traded in:Nse-bse

Story:It has about 1,900 branches spread across the four southern states. Its key focus area is lending to small and medium enterprises (SMEs). It has recently acquired Pune-based Shree Suvarna Sahakari Bank Limited (deposit base of Rs700 crore, advances of Rs400 crore and three lakh customers). With this acquisition, IOB is aiming at generating Rs1,000 crore business from Pune. It is also planning to open branches in Malaysia along with Andhra Bank and Bank of Baroda. There has been a 19% growth in interest earned in the March 2009 quarter over the year-ago period. This was due to a 26% growth in income from advances over the year-ago period. Gross NPAs for the March quarter increased 12% from the year-ago period; but are still at reasonable levels. Its five-quarter sales growth and operating profit growth are 28% and 24%, respectively. Its operating profit margin is 23%. Valuation is low. Its market-cap is just 0.41 times its income and 1.74 times operating profit. The price to book value ratio is 0.75. The dividend yield ratio is 5%. All these are attractive figures. Buy this stock at around Rs80.

2)Scripscan:Allahabad Bank
cmp:88
Traded in:Nse-bse

Story:Its 2,165 branches are located in an area (eastern India) where bank deposits are a popular savings instrument. Interest income for the March quarter grew 11% over the year-ago period. Total income has grown by 20% in the March quarter, largely because of the phenomenal 76% rise in ‘other income’ which was driven by high treasury and fee income. The gross and net NPAs were down in the March quarter during which the Bank restructured advances worth Rs2,650 crore; restructuring proposals for another Rs600 crore were pending approval which may take the total restructured advances to 5.6% of the total. Advances for the March quarter were up 10%. The Bank is aiming for an 18% growth in deposits and credit in the current fiscal. The five-quarter average income growth and operating income growth is 21% and 24%, respectively. It operates with a margin of 21%. Market-cap is 0.42 times and 1.92 times income and operating profit, respectively. Its price to book value is 0.69 and dividend yield ratio is 3%. Buy this stock at around Rs75.

3)Scripscan: Canara Bank
cmp:274
Traded in:Nse-bse

Story: It has 2,733 branches spread across India and abroad. The performance in FY09 and the March quarter has been good. Interest earned increased 23% in the March quarter over the year-ago period. This is because of a huge growth of 36% in income from advances. Loans to the infrastructure sector are high – 12.5% of the net advances. The Bank has made a conscious effort to reduce bulk deposits as they yield low return. The proportion of low-cost deposits has fallen to 31% in FY09. Restructured loans are 1.5% of its advances – among the lowest in the sector. The Bank has reduced its prime lending rate by two percentage points, while cutting the deposit rate on various maturities by three percentage points. However, the Bank is betting on higher branch roll-out, large ATM network and core banking solutions to help bring in more low-cost deposits. In FY10, the Bank aims to take aggregate business to the Rs400,000 crore mark from Rs325,000 crore at the end of March 2009. The five-quarter average sales growth and operating profit growth are 18% and 24%, respectively. The five-quarter average operating profit margin is 20%. The market-cap is 0.52 times its sales and 2.53 times its operating profit. The price to book value is 1.01 and dividend yield ratio is 3%. Buy this stock at around Rs250.

4)Scripscan:Corporation Bank
cmp:340
Traded in:Nse-bse

Story:One of the smallest government banks, it has 1,054 branches but opened as many as 73 new branches in FY09. The March quarter has been great. Total income increased 50%, thanks to a 31% rise in interest income from advances and a huge growth of 134% in ‘other income.’ The loan book is diversified among farm loans (9% of the loan book), SMEs (11%), large industries (32%) and retail (19%). Its credit to the infrastructure sector went up 11%. Gross NPAs for the March quarter were down 4%, though the net NPAs increased 10%. Even so, the net NPA to total advance ratio was down to 0.29% in the March quarter from 0.32% in March 2008. Cost of deposits increased to 7.02% from 6.45% last year. However, a large portion of the bulk deposits which will come up for renewal will be priced lower. The five-quarter sales and operating profit growth are 36% and 38%, respectively. The five-quarter operating profit margin is 25%. Market-cap is 0.66 times its income and 2.56 times its operating profit. The price to book value is 0.92. The Bank declared a dividend of Rs8 per share with a face value of Rs10, which brings its dividend yield to 3% on the current price of Rs 340. Buy this stock at around Rs300.

5)Scripscan:UCO Bank
cmp:43
Traded in:Nse-bse

Story: Uco Bank’s total income in the March quarter grew 23% on the back of a 22% rise in income from advances and 29% rise in ‘other income’. The asset quality has improved in the March quarter. The net NPAs to total advances ratio improved to 1.18% in the March quarter from 1.98%, during the same period last year. The Bank has received capital infusion worth Rs450 crore from the government through perpetual non-cumulative preference shares as a part of the stimulus package. As per the expansion programme, the Bank plans to open 120 branches in FY10. The five-quarter sales and operating profit growth is 26% and 29%, respectively. It operates on a low margin (15%). Market-cap is 0.25 times its sales and 1.7 times its operating profit. It declared a dividend of Re1 per equity share. This brings the dividend yield ratio to 2%. Buy this stock at around Rs38.
Source:Moneylife

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