Vaibhav Agrawal of Angel Broking said that there is bound to be some amount of MTM (market to market) losses this quarter. He feels that top banks are a good buy.

“There could be some further downside in the near-term with more bad news on the horizon”, he added.

Excerpts from CNBC-TV18's exclusie interview with Vaibhav Agrawal:

Q: Inflation is out and is expected to go higher. The government is also talking about 13%. What would be the net impact on banks and what are you doing with your report on them right now?

A: We have reduced our earnings estimates for banks across the board. We have also reduced our target prices. A lot of banks are attractive right now, at these valuations. So, we are maintaining a bias on them. But we have reduced our estimates.

Q: Where will the pain show? Will it come on margins or volumes or both? Where does the treasury fit in, especially in banks that may have moved their investments into the Hold to Maturity category?

A: There is bound to be some amount of MTM (market to market) losses this quarter. One cannot transfer more than 25% of ones net demand and time liabilities from bond portfolios. So, there would be a certain section of banks that will have MTM losses.

Tradeoff is definitely deteriorating as the RBI continues to tighten. It is going to be a tradeoff for banks. Growth is definitely going to come down. Margins will be under pressure especially for the midsized PSU banks.

Q: Is all the bad news factored in the price already? Are you buying any bank stocks at all? What are your picks if any at this point?

A: There could be some further downside in the near-term with more bad news on the horizon. But even at these prices, top banks are a good buy. You can go for businesses considering that all banks are pretty cheap. It is best to go with the best franchise with the best businesses and the leaders.

Q: Margins and volumes will be under pressure, so where do you think the growth opportunity will come in? Even at this time earnings we will be watching out very closely at the outlook that management’s give for the future. What will be the next growth trigger for the entire banking space in this scenario?

A: Definitely as far as private banks are concerned, their secular expansion continues in terms of their branch rollouts and so on. So, they will continue to gain a market share. Even if the industry grows at about 18% or say 25% it will be a pretty good growth story even if it is not 30-35% as it was earlier.

There will continue to be some pressure in the near-term and the trigger is bound to be what the inflation scenario turns. This could be dependent on the global monetary policy and how it shapes up with major central banks.

Q: What would be your buys in this sector?

A: Our top picks are definitely the private sector banks like ICICI Bank, Axis Bank and HDFC Bank. There is a lot of value even in the PSU bank space. But there could be further downsides in the near-term. So, it would probably make sense to stick with the best quality banks right now.