Bank credit growth likely to be 15-16% in FY13, says IIFL

In an interview with CNBC-TV18, Mehta said that the valuations for ICICI and Axis Bank are quite attractive and therefore, selects ICICI Bank and Axis Bank as his top picks from the sector along with IDFC and HDFC Bank . On the gold loan front, he is positive on Manappuram Finance .

Below is the edited transcript of his interview with CNBC-TV18. Also watch the accompanying video.

Q: First a word on the kind of concerns that SBI laid out yesterday in terms of credit growth getting trimmed quite significantly. Would you be marking down credit growth expectations both for PSU and private?

A: Yes absolutely. I think at the system level, the credit growth still remains reasonably healthy at 17-18%, surprisingly though. But, overall terminal growth that we are expecting for FY13 is about 15-16%.

It has been resilient to surprise for most of us but, it has to catch up with the underlying economic trend. We are expecting it to slowdown a bit throughout the year and which is why ending the year with kind of 15-16% growth for FY13.

Q: There hasn't been any big move in terms of bringing down rates either at the deposit end or the lending end. What to your mind is now the key risk going into the second half, is it what happens with core credit growth, is it an NPA problem or is it that margins will get pressurized because of the fact that rates are just not moving?

A: I think more importantly, as an analyst, we are looking keenly at the incremental trends in asset quality, which is the slippages and restructuring along with the margins. I think these two trends will determine how the prices move from hereon. As you said, there is an inherent inertia as far as lowering of the deposit rates is concerned, given the fact that the inflationary expectations are high.

There are certain other debt products which are offering higher post tax returns than fixed deposits (FD). Also from the bankers side, the deposit mobilization remains at a multi year low. Clearly, they are averse at this point in time of having a negative reaction from the depositors if they were to reduce the deposit rates by 25-50 bps on the overall bucket.

Q: How would you rate something like an ICICI Bank, you have a buy on that? What is it premised on?

A: ICICI Bank has been our top pick for the last six months. We have been saying this that the argument still remains about the valuation expected to re-rate faster than any other bank, on any signs of economic recovery or any signs of lowering of stress on the entire asset quality sector.

We think that to book ICICI Bank at 1.5 times FY13 price remains a very attractive bet from the valuation perspective. Also if you look at the performance of the banks for the last three quarters, it has been pretty robust both at the margin level as well as at the asset quality level. So there is no mismatch in terms of valuation and fundamentals. Clearly both are indicating that the bank should re-rate sooner than later.

Q: There was a little bit of pressure on Axis Bank when a big block got sold recently, how would you approach that stock and what kind of valuations do you think are fair for something like Axis?

A: Axis again is our second pick. Overall, largely we have been staying with the private space over the past nine months. We have been liking the large private banks, so Axis Bank is also one of our preferred picks.

Again the valuation argument also stands true for Axis Bank with 1.6 times FY13 price to book. The valuations are attractive considering the average multiples of the bank over the past 5-6 years. In terms of asset quality, if you look at X power asset quality remains reasonably strong and resilient.

Power is the only issue and I think any restructuring in worse case of power exposure at the bank side can only happen in FY14, not in FY13. That too it is hinged on whether the reforms pick up from here or not.

I think as far as negativeness or the pricing in of the asset quality risks are concerned, Axis Bank had actually seen the worst. From here on, again inline with ICICI Bank, I would say that it will gradually re-rate if things start improving at the macro level.

Q: Do you track any of these NBFCs, anything that you buy from there?

A: Within NBFCs you have got a limited coverage. But we do like IDFC. On a cursory basis, we like IDFC as also HDFC which is the housing finance company. Amongst the gold loans, we still think there could be some upside as far as Manappuram is concerned.