Opinions and observations expressed on this blog reflect the authors' individual experiences and should not be construed to be financial advice. None of the members of this blog are licensed financial advisors. Please consult your own licensed financial advisor if you wish to act on any recommendations here.

Wednesday, July 14, 2010

Are Indian Bank Stocks Good Buys Now?

For years, the Indian bank stock, principally HDFC Bank (HDB) and ICICI Bank (IBN) have traded at earnings multiples that would make even an aggressive growth investor flinch. Back in the heady days of 2006 (at least they were heady days for emerging markets), these banks often traded at 30-40x forward earnings. That compares to the general practice of only paying 15x forward earnings or less for most bank stocks. Part of this discount, regardless of growth rate, comes from the fact that banks can in fact be prone to massive calamities. Of course, we wouldn't know anything about that. Speaking of which, I haven't seen my shares of Wachovia recently. Do you know where they might be? (Disclaimer: I never owned Wachovia)

That being said, after a few years of continued earnings growth and stagnant stock prices, it might pay to see where we are here. IBN, on its surface, seems to be the better buy, trading at around 14x next year's earnings and growing earnings at a torrid pace. HDB trades at over 21x next year's earnings with a very similar growth clip, though the market may be indicating that analyst estimates might be in error. Frustratingly, I must confess I know little of the Indian banking system, being much more familiar with Brazil's among the BRIC countries. What I do know is that the central bank is currently tightening which will probably keep these stocks under pressure for some time to come as their net interest margins come under pressure. I would say then that there is little reason to nibble here for now, but in about six months time it may be fruitful to buy one or both of these banks as long term holdings. The lofty estimates for earnings growth should be obtainable so India is a country with relatively low credit utilization.

Of course, there are those that are skeptical of India's long term prospects. I am not among them and I actually favor the long term prospects of India over those of China for the reason that I believe India to have a more fundamentally sound political system. I am sure there is going to be a great difference of opinion on that point.

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