Sep 12, 2013 12:08 PM IST | Source: CNBC-TV18

Kotak Mah, HDFC Bank top picks; avoid Yes Bank: Macquarie

Among the banking stocks, Macquarie is positive on Kotak Mahindra Bank and HDFC Bank. Suresh Ganapathy, banking analyst at Macquarie recommends avoiding Yes Bank due to weak capital standpoint.

Foreign investors are positive on private sector banks, but not so much on the public sector banks (PSUs), says Suresh Ganapathy, banking analyst with Macquarie. Whereas, long-only funds for these will stay invested and not buy on an incremental basis as they will be driven by redemption-related pressures .

Axis Bank has been one of the preferred picks in the banking space from a beta perspective and see 20 percent upside in it, he told CNBC-TV18. Meanwhile, his top picks include Kotak Mahindra Bank and HDFC Bank. He advises investors to stay away from Yes Bank as its capital standpoint may be weak.

Among the non-banking finance companies (NBFCs), he recommends investing in LIC Housing Finance on the back of better valuation support.     

Also read: Not good time to enter mkt; avoid banks: Edelweiss

Below is the edited transcript of his interview to CNBC-TV18.

Q: Your note after you met the Foreign Institutional Investors (FIIs) is very encouraging. You were surprised that the FIIs are much less negative than domestic investors are. What are they positive about? Which sectors and why?

A: They are traditionally positive on the consumers and IT and Pharma sector. Financials have bombed out quite a bit. There was some interest seen in them, but continues to be only in some of the bombed out private sector banks. It is still not in PSUs.

The FIIs continue to be significantly underweight the PSU banks. In fact, the only PSU that they own, if at all they own, is State Bank of India (SBI).

Q: What are the long only funds doing with some of these specific names like ICICI Bank, Axis Bank etc?

A: They are stuck on to their names as there is no point in selling at pretty low valuations. Long only funds would be more driven by redemption-related pressures. I don't think they are going to capitulate anytime soon. They would stay invested but incremental buying is always going to be a bit more reluctant.

If you look at the rally, it is messy. These have happened on the back of very poor volumes. So I really don't think the rally in these names is sustainable at this point in time.

Q: What is your view on Axis Bank in terms of price targets? What were your takeaways when you met the management?

A: We have about 20 percent upside in Axis Bank. The biggest positive thing about Axis is its franchise; it has reasonable amount of CASA. There is a valuation support at this point in time. Despite the run-up, the stock is closer to book value on an FY15 basis and is very well capitalised.

Fortunately, it raised money in December. That is holding it in good state. It still remains one of our preferred picks. Clearly from a beta perspective Axis is a better stock to own than any of the other PSUs in our view.

Q: What about Yes Bank?

A: Interestingly in Yes Bank, the biggest problem has been that it is a wholesale funded institution. Current tight liquidity doesn’t necessarily support the stock from a sentiment perspective. Though the management has been in a better position to deliver it, time an again, but the other issue has also been that of corporate governance.

There in the sense that the tussle is not taken well by the markets and more importantly it has not raised capital. And from a capital standpoint it is the weakest amongst all the private sector banks. So I would avoid Yes Bank now.

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