Cautious on banking space in medium-term: JP Morgan

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Cautious on banking space in medium-term: JP Morgan

Seshadri K Sen, Banking Analyst at JP Morgan in an exclusive interview with CNBC-TV18 said his longer-term view on the banking was still positive but was cautious in the medium-term.

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After spearheading a brilliant rally through September and October the banking index gave up a lot of its gains and is now waiting and watching a couple of important trends kind of manifest themselves. The Reserve Bank Governor at the annual banking conference states that banking margins needed to be trimmed. Then of course, there were interest rate hikes, the inflation scenario, all of them threatening to bring the margins down for this space. Seshadri K Sen, Banking Analyst at JP Morgan in an exclusive interview with CNBC-TV18 said his longer-term view on the banking was still positive but was cautious in the medium-term.

Sen feels the worst is over for micro finance institutions in terms of newsflow and sees a turnaround in SKS Microfinance .

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Sen is positive on ICICI Bank , Axis Bank and Punjab National Bank , while he is neutral on SBI . Axis Bank may face margin pressures in near-term, he added.

Below is a verbatim transcript of his interview with CNBC-TV18's Sonia Shenoy and Latha Venkatesh. For complete details watch the accompanying videos.

Q: What do you make of the banking space generally, the overall picture? Would you still be positive?

A: Our longer term view, if you take a one year view still remains positive because we think the economy looks fairly strong, loan growth should start to kick in fairly strongly over the next year or so. Asset quality, except for a small concern in the SME space, is doing very well and improving all the time. So, the general drivers, if you take a 12 months view, is positive for the sector.

However, as you have just been alluding to the three month view is a little more cautious. We are seeing a margin pressures building up from the shortage of liquidity in the system which has led to deposit rate hikes. There will be a lag before these deposit rate hikes are passed on in terms of lending rate hikes.

Also, it's not very healthy for the sector to see such spikes in rates that does lead to some disruption in the balance sheet and if it continues for a long time to loan demand. So, once we get past the first quarter of the next calendar year, I think this sector should stabilize a bit, but it could be a little rocky for the next three months or so.

Q: So just sticking with the shorter terms then, the cautious approach that you have for the shorter term. In such a situation, would you go ahead and back stocks or back banks that are better plays, the ones that have a higher return on asset (RoA), higher current account, savings account (CASA) ratio, something like a PNB?

A: In terms of our view on how to play this out is clearly sort of if you look at stronger deposit profile. That is certainly one factor which will help banks see through this. But if you look at the anecdotal evidence, almost every bank is having to raise deposit rates even the ones which we are traditionally strong deposit profiles.

A more important driver would be to look at non-net interest margin (NIM) drivers for earnings. So, if you got a clutch of banks which have, especially those exposed to retail lending which are seeing fairly dramatic improvements in asset quality, especially on a year-on-year basis. ICICI Bank is one of them. Therefore, while NIMs may not do very well for these banks, those banks with non-NIM drivers like asset quality would probably do very well in this period.

Q: Why don't you compare and contrast ICICI Bank and Axis Bank for us? Both of them have an acquisition of a kind where they were weak, Axis with Enam getting into investor banking in a slightly bigger fashion and ICICI of course the big Bank of Rajasthan acquisition. In terms of how you see their growth potential, would you prefer both, would you prefer one over the other? What's your stand?

A: We like both. Axis may see some margin pressures in the near-term, but over a longer period of time we like both. Axis is probably one of the stocks which is the most linked to the economy, plays in many more segments than some of the other private banks. So, it's the one which has a mid corporate exposure, large corporate exposure. When the economy generally goes on an upstream, those sectors do very well, you tend to make a lot of money. So, it's a very difficult choice to pick between the two. I would pick both at the moment.

Axis Bank a little bit of margin worries in the short-term, but again the management has been talking about the fact that the margins of the last three-four quarters are not sustainable. So, I am not sure that the margin fall would be a surprise to the street. So, it's a difficult choice, I like both stocks.