Paribhas has applied a new methodology to bring out hidden risks in Asian financial sector following spiralling bad debts and high level of risk due to economic uncertainty in the region.

"The fear at present for any investor in banks is that they cannot find a realistic measure of the risks they face. The game has changed. What used to be a search for reward has turned into avoidance of risk, although this risk has proved very hard to price -- traditional measures are no longer up to the task," said the internal report titled "Asian Banks: A Dangerous Profession."

After sifting through the financial sector stocks, the report, prepared towards the end of September, has identified SBI and ICICI Bankstocks in India as "offering strong value relative to the level of risk that investors are taking." Among the three Asian banks to be avoided, the report has identified HDFC Bank of India as one.

To get at a realistic risk measure, Paribhas has introduced a ``health check'' model, which aims to give as objective as possible a view of a bank's ability to withstand the region's problems.

"We identify a single measure of risk, which we term a ``recap cushion,'' which measures a bank's ability to withstand further deterioration from current projected peak non-performing loans (NPLs), that can be used as a very strong tool in the investment decision. This single value implicitly tests the adequacy of provisioning, existing peak NPL expectations, margins, efficiency and balance sheet employment to determine just how much more bad news a bank can handle. Just how bust some of the regional banks are becomes very clear," the report explains the methodology.

In order to find out whether the market is pricing therisk correctly, Paribhas has contrasted recap cushions with minimum adjusted book values (after provisions and reserve deficits).

The report has recommended ``buy'' on SBI, Bank of Baroda and ICICI Bank, ``sell'' on HDFC Bank, and ``no-action'' on Bank of India and Oriental Bank of Commerce.

About Bank of Baroda, the report says that its share is underpriced at the current price. The share price has come down still further since the first two weeks of October following heavy bear hammering on financial sector stocks in general.

"BoB's asset quality has improved substantially over the past few years as net NPLs have declined from 24 per cent of loans in FY92 to 6.1 per cent in FY98. We expect this downward trend to continue as BoB imposes stricter discipline in the appraisal of applications and continues aggressive collection, provisioning and write-off of bad debts," the report said.

On HDFC Bank, the report says that "although we like HDFC Bank because of its strong EPS growth, we recommend a sellon the stock because even on a FY99F PE to EPS CAGR FY97-00F comparison, it commands a hefty premium to the banking sector and to ICICI Bank, a private sector bank of comparable size."

On SBI, the report says that at the current price, the stock is cheaper than ever. "Hidden reserves and strong internal accruals (derived from historic prudent provisioning and the understated book value of property held) are likely to provide a cushion for any unforseen provisioning requirements in the future," the report said.