See bounceback once banks hike int rates: Karvy

There has been much talk about Net Interest Margins or NIMs coming under pressure and how companies will be looking at hiking not just lending rates, but also deposit rates to maintain margins.

Hemindra Hazari of Karvy Stock Broking said RBI is sending clear signals to the banking system to increase interest rates across the board. The longer they take, the more pain they will have to suffer on the stock market.

He expects banks to take a hit on their non-SLR investments in Q1. But once banks increase their interest rates, he expects to see a bounceback. His top picks include Bank of Baroda, Canara Bank, Union Bank, Dena Bank.

Excerpts from CNBC-TV18's exclusive interview with Hemindra Hazari:

Q: You were surprised by yesterdays move, how much more do you expect the Reserve Bank of India or RBI to do and what would be the net impact on the NIMs for major banks?

A: Ever since you've had high inflation figures, it was expected in the market that the RBI would take strong measures to curtail inflationary pressures. So it was not totally unexpected and that the way the quantum was somewhat unexpected.

Having said that, I think the RBI is very clearly sending a signal to the banking system to increase interest rates across the board. Unfortunately political establishment is singing a different tune so banks are extremely reluctant to increase their interest rates. The longer they take, the more pain they will have to suffer on the stock market.

Q: Multiple headwinds for the banks now on account of these rate hikes - out of the four key instances, probably slower credit off take, impact on the NIMs, impact on lot of these PSU banks, bond portfolios and possible NPAs increasing going forward. Which you feel is the key factor that investors and banks should fear and whether we will see some sort of slowdown in Q1?

A: At this moment in time, I think it will be the impact on their investment portfolio because in particular the non-SLR investments would be hurting and we expect banks to take a hit on those investments in Q1.

Having said that, bank margins are already under pressure and they have been under pressure because they have been reluctant to increase interest rates. So these are all self-inflicted wounds. They have to show some independence from the political establishment and they should increase their interest rates.     

Q: ICICI Bank’s Chanda Kochhar just told us a little while back that she sees retail credit growth at 10-15%. Is that the kind of slowdown that you are factoring in as well and on the NPA front given the credit quality for certain pockets of loans, do you expect there to be an upward bias there?

A: On the NPA front yes, I think all banks who are really focusing on retail are now lowering their targets and naturally so. You have seen NPA build up in the retail space, I think mainly they have to blame themselves because they have been overly aggressive in that segment.

Another segment, which is showing some strain, is also commercial real estate. So obviously in these two areas, I think both, regulators as well as bank managements, realise that they have to slowdown their growth. Agrarian lending has been quite aggressive for the last two to years. That has also been because of some political directive and you could see some build up in NPAs happening in one to two years.

Most banks are still quite strong on SME and top corporate loans. So you could see growth there.

Q: What’s the call on major stocks right now?

A: By and large, we remain positive because we think most of the concerns have been overdone. Once banks increase their interest rates, you should see a bounce back. We are quite confident about stocks like Bank of Baroda, Canara Bank, Union Bank, Dena Bank. So these would be our top picks.

Disclosures:

You can assume that as an analyst and as a firm we do hold some of these stocks.