Sharma further says that their preference is still large private sector banks. That is probably the number one difference in pecking order, followed by the large PSU banks, followed by a little bit of NBFCs in both asset financing as well as housing finance sectors.
A lot of banks have declared numbers and arguably on expected lines and NIMs have been on the better side. Can you talk to us about the NIMs trajectory that you are predicting or what to watch out for in the coming quarter for NIMs to be maintained?
We believe there would be some bit of margin compassion as we go ahead along the quarters this year because deposit rates have obviously jacked up in the system. And because of the impending big merger, there would be some pressure on deposits in the overall system and therefore, as deposits get refunded in the balance sheets of banks, there could be some marginal pressure on margins.
But having said that, we hope that this steady growth continues in the next few quarters. Obviously, last year was a goldilocks scenario and we are not expecting the same mid teen growth. We are expecting to maintain a slightly lower than mid teens growth in the banking system this year. But if that steady growth comes with no spike in credit cost and even if a little bit of margin hits takes place, even then banking earnings would be quite resilient compared to most of the sectors in the system. That is what we are looking forward to, resilient banking earnings and no spike in credit cost and probably a little bit of slowdown in overall growth for the system.
The macro environment plays a very important role. Now there is a consensus view that rates probably in the system may not go up further from here on or they seem to be on the flatter side and may decline towards the next year. If that is your thesis as well, how would you change your positioning? Would you look at lower CASA banks? How would you look at names or what kind of banks would you now look at?
Over the past few years, we have preferred banks over NBFCs. That has been our clear preference and even in banks, we preferred corporate banks over retail banks, given that those banks are coming out of the big NPL crisis that took placethree, four years back. However, the scenario has changed a lot today, that differentiation between corporate and retail banks has practically ceased to exist because even though the erstwhile corporate banks have become more retail in nature, almost every bank has between 50 to 60% of their balance sheet in retail loans today.
Therefore, from a stock perspective, the choice is more bottom up now rather than classifying them into sub sectors. NBFCs are starting to look a little bit more attractive given their valuation, growth prospects and as you said, interest rates might start to cool off and therefore their liabilities cost could come down over the next one or two years.
Our preference is still large private sector banks. That is probably the number one difference in pecking order, followed by the large PSU banks, followed by a little bit of NBFCs in both asset financing as well as housing finance sectors.
Since 2019, the consensus in the market was that we only want larger sized banks, we only want banks which can manage costs and manage a little bit of slippage here and there. Do you think that is changing and do you think smaller banks are where valuations are attractive?
Again, one has to be stock specific because in the last one, one and a half years, the small and midcap banks have actually done quite well and valuations have moved up across the board. Having said that, if you look at the balance sheet profile of some banks, those profiles are quite interesting.
Some of those banks can show higher growth than the system for the next two, three years given that we are expecting a benign credit quality scenario and reasonable growth outlook scenario. Having said that, one has to be stock specific. There are a few stocks that look attractive at this point of time, even in the midcap and smallcap segment. But it is not like we prefer small, medium over the larger ones at this point of time or we prefer larger ones over the smaller ones at this point of time. Obviously, given the portfolio size and liquidity the larger banks are always a large part of the portfolio and valuations are reasonably attractive there as well.
What is your thought on HDFC Bank? Given that the RBI has allowed it to meet the priority sector lending requirements, what is the impact going to mean for the merger as well as down the line?
We cannot really talk about individual stocks. I would not be able to comment on this. But overall, large private sector banks valuations are reasonably attractive at this point of time. Given the overall outlook of the market where we see pressure on the global sectors, given the impending slowdown in the US and Europe, and the slowdown in IT that we have seen from the largecap results, the way I talked about the earning resilience of financial system that we are expecting, we believe large private sector banks could be a good pocket of decent earning potential as well as reasonable valuations.
When you look at banks, you can come down to the top three-four banks. I understand you cannot talk about stocks, but there are pure banking plays, there are banking plays with a lot of large insurance company, mutual fund company in the current environment, now that NIMS have expanded. How would you like to play? Would you like to play with companies that have a higher fee based model as well?
Well, frankly, there are hardly any banks in India which are not financial conglomerates. As of now, almost every bank has a large insurance subsidiary or some asset management subsidiary or some of the other para-banking businesses. But if you look at those para-banking sub sectors – insurance, mutual funds and securities arms that are listed – valuations have become attractive there as well.
If the cycle does not turn out to be as bad for capital markets and the sort of projected slowdown in insurance is a lot less than what people are expecting, what the market is expecting, then there is reasonable comfort on valuations in those para-banking sectors as well. So as of now, there is not a clear difference between pure banks versus conglomerates, but conglomerates look interesting because the para-banking subsidiaries have corrected over the last three-four years and they have not delivered any returns, and valuations are fairly attractive, we would say.
Give us a sense as to what your outlook is when it comes to the asset quality concerns for some of the banks. Do you believe that this is now behind us, or are there select banks that you believe could have a lingering concern?
I am not sure if I am right on this one, but someone just told me that some of the PSU banks now have net NPAs below 0.5% and that is as good as it gets. And surely over the next one or two years, marginal deterioration in credit quality can happen.
But across the large segments that Indian banks cater to – be it corporate, housing or retail loans, we are not seeing any signs of stress building up or any signs of over-leveraging. Probably corporate India has been in the best shape that I have seen over the last 15-20 years. The debt-to-GDP of BSE 500 is almost at its lowest in the last 10 years. So frankly, we are not seeing stress building up in any of the large industrial segments or any of the large personal segments. From a quality point of view, we are fairly convinced that in the next one or two years, chances of an asset quality shock or the stress in credit quality are fairly low.
