The Bank Nifty ended the week creating a new record in excess of 19,000 points. Dealers continue to be bullish on banking stocks for a number of reasons, though some of the private sector banks continue to be very expensive.

An Interest Rate Cut Looks Imminent

An interest rate cut looks imminent given that inflation has been consistently falling. WPI Inflation has now reached zero which is good news for investors.

Given that inflation is expected to stay benign for the next few months, continue to expect interest rates in the economy to fall by at least 10 per cent. When interest rates fall banks could expand their margins and improve profitability.

Government serious to reform PSU banks

The government is extremely serious to reform the PSU banks. The 2-day Gyan Sangam Meet may lead to some positive outcome for the banking sector. The government may not be averse to merger of some of the PSU banks, especially the smaller ones with the larger ones. Also, there is a high possibility that non performing assets could pick-up once economic growth in the country gathers momentum. This could lead to a re-rating of stocks from the PSU banking space. One of the biggest worries for the sector continues to be with regards to non performing assets.

What to buy now?

Private sector banks have rallied sharply in the last few months, making some quality banks like HDFC Bank and IndusInd Bank very expensive. In fact, there seems to be very little sense in chasing the stocks of these banks at such high levels. The better proposition would be to look at value in government owned banks.

Most of the banking names from the space are quoting at between 0.5-0.8 times book value, making them an attractive proposition. Banks like Syndicate Bank and Bank of India may be the top picks from the space. In fact, dividend yields on a bank like Syndicate Bank works out to around 4 per cent, which is not bad at all. Some of the banks can offer good value especially from a 2-3 tear perspective. One can buy these banks at lower levels.

GoodReturns.in