Macquarie Capital Securities ‘Suresh Ganapathy believes most banks’ valuations are not expensive despite the recent rally in these stocks.
“If you look at the ratings of these banks in relation to the historical average, they are at best around the historical average,” Ganapathy said in an interview with CNBC-TV18.
“In some cases, like the State Bank of India (SBI), they are still below historical averages. So there is still enough upside in finance because I think the next five years will be one of the best years for the entire financial sector, ”he said.
In his opinion, there is still a lot of room for re-evaluation of the financial sector when one looks at its valuations against other sectors.
“All bank stocks, despite the recent rally, still offer significant upside potential even relative to their historical averages,” he said.
He believes that a major catalyst for the revaluation would be a pickup in credit growth. “We believe we should see at least credit growth from 5 percent to 6 percent next year, now closer to 10 percent and that should give the markets more confidence,” said Ganapathy.
The return on investment (RoA) would be an important parameter to look out for.
“RoA will take some time to recover as all banks are over-capitalized, but when SBI is closer to its 1 percent RoA it has achieved over the past 25 years and ICICI Bank 1.7- If you hit 1.8 percent, the markets will be very happy because then you know you are moving towards your sustainable levels of profitability and you can expect further re-evaluations in that name, ”he said.
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(Edited by : Santosh Nair)
First published: IS