Terming the Essar Oil-Rosneft deal as a positive development for banks with large exposure, Shyamsunder Bhat of Exide Life said that there are several other positives such as size of the foreign direct investment in India that can be taken from the deal.
Bhat said that: “The fact appears that we are possibly past the worst of the crises in terms of NPA for the banking sector. Though the improvement on an overall sector is likely to be gradual, it should take possibly another 3-4 quarters before we see a normalisation, but possibly clearly past the worst.”
Below is the transcript of Shyamsunder Bhat’s interview to Ekta Batra and Prashant Nair on CNBC-TV18.
Prashant: As a fund, you have exposure to ICICI Bank. I know you cannot talk specific stocks, but directionally, what does this huge big USD 13 billion Essar deal do for the banking sector because exposure to the group per se was classified as chronically stressed? There is this huge amount of inflow which is going to come in to Essar. Does this meaningfully change things for banks with exposure or do you think one will have to be very granular before one makes that conclusion?
A: You are right. It is definitely a very positive development. For the banking sector in general though obviously, for specific banks with a larger exposure it is a bigger benefit. But directionally, the positives are very evident. We have been expecting that we have possibly been seeing the bottoming out or the worst of the non-performing asset (NPA) issue in the banking sector in the last couple of quarters. And news flow like this, thought it has been in the offing for some time, the culmination into the final deal as what has happened now, and the size of the deal or even from the foreign investment perspective, the size of the foreign direct investment (FDI) for us as a country, there are several positives to look at on this front.
So, while individually stocks would react based on the individual exposures to troubled groups and their resolution, but as a broad indicators clearly, the fact appears that we are possibly past the worst of the crises in terms of NPA for the banking sector. Though the improvement on an overall sector is likely to be gradual, it should take possibly another 3-4 quarters before we see a normalisation, but possibly clearly past the worst.
Ekta: So, would you for example, buy a DCB Bank at current levels or a Lakshmi Vilas Bank or an IndusInd Bank largely retail focused banks, not that much in terms of gross NPA issues but high valuations? Or would you go for a couple of the banks which still have a valuation catch up as compared to these peers I just mentioned?
A: While, on individual banks I will not be able to comment, but what I would say is that our portfolio has a mix of retail-oriented banks with lesser NPA issues as well as an exposure to banks with some amount of troubled exposure but which already appears to have been discounted into the price underperformance in the past few months. So, we have a mix of exposure to both the types of banks.
Prashant: What is your view on the market because many people, investors that we have been speaking with on the show have been expressing scepticism for a while, but now, finally, many are saying that this is it, a correction has started and we are in the midst of it? How would you look at it?
A: Actually, our view is that while many of the market participants might have been looking for a price correction, what has been happening is more a time correction and possibly yes, we are already seeing that time correction for some time now and that is very good for the market given that a price correction or especially a sharp price correction generally does tend to scare small investors. But a time correction like this where it is a gradual correction over a period of time, clearly bodes really well for the longer-term strength in the market. In terms of price correction, we have seen possibly a 4 percent correction in the Nifty over the last month. So, there might be a small further correction in the offing, but clearly very difficult to time that. And given that one of the biggest advantages of time correction also is that it helps investors roll forward their earnings to subsequent quarters without causing significant damage to the price in the market and that is what is happening now. And therefore, we look at the market both from the medium-term as well as the longer-term quite positively.