In an interview with CNBC-TV18, Kaku Nakhate, Country Head – India at BofAML shared her views on the current situation a banker is going through, on mergers and acquisition (M&A) deals, housing sector and many more things.
Below is the verbatim transcript of the interview.
Q: Is it a difficult time for a banker in India at this point?
A: Good times and bad times come and go, we are in the right direction, in the structural reforms that India has been doing. From banking side, all that is happening, clearly everybody is looking out as what our next steps are going to be and in a way, it is going to also help us increase the governance standards and policies as we go along in line with what Reserve Bank of India (RBI) has been doing for the several months at length.
Q: Given the scenario in which last year was ruled mostly by the big reforms that India took over under Modi government on goods and services tax (GST) and demonetisation and that changed the outlook for India as well, we got the rating agency also change the rating for India but this year how do you see with the fraud situation developing, how is the global market react to India and how will the perception change?
A: I must say that people have been worried about the recent developments. We need to explain a bit better. Also as you see when US went through a rough time, what they did was the announcements of these whole things or the financial mess was kind of publicised but within a week or ten days the Troubled Asset Relief Program (TARP) was announced and then they put the action into play and over the next 24 months they cleaned it up.
Similarly, if it was in China, we would probably not even know, they would have discovered it, they would have found a solution and they would have come out with the package and then the announcements would have come.
India is a democracy and we have our own way, so sometimes, what we talk openly as debate is probably perceived wrongly in different parts of the world and hence a good resolution and I keep telling that government has been supporting banks and why these are process changes, these are things that are happening everywhere else also in the world - for example, why cyber security very important and why are these trades monitored, it is also to take care of terrorist financing– the whole KYC came from that aspect.
So similarly, I feel as long as we spell out the processes, we spell out the good that even RBI has done, we have done Export Data Processing and Monitoring System (IDPMS), Import Data Processing and Monitoring System (IDPMS) - but all needs to be packaged in a proper fashion for people to understand that regulations are changing and some of these are also being discovered because regulations are changing.
Q: You head a large foreign bank in India, how far away are we from the global standards when it comes to real governance structures in the banking sector?
A: Two-three things I would say. Globally, everybody has been following on capital adequacy, the Basel norms, India has also been on the path that is why if you see, our tier-I capital has been added on as and when required and maybe we look at one more year delay of FY19 but I think we should be well on track as far as the Basel norms really are concerned.
What needs to be looked into is what we have also learnt across in the last seven years or eight years that yes, banking clearly is relationship based but we cannot ignore the quantitative directions, which we may get or the risks do we assess so that we also help corporates come into the loop of understanding where what are the requirements to get the cash flows how to monitor them, when to put in the money etc and I would say in the last several months all the big banks and especially the private sector banks have moved quite steadily and strongly and the provisions have also made all of us think together.
Q: While we are just about coming out of the non-performing assets (NPA) situation with so many resolutions going on at this point of time and bank recapitalisation got announced by the government at a time like this, PNB kind of a situation is dampening the sentiment in the banking sector. You have been working in the equity market transactions and I know you as a very strong franchise there, looking at that particular area, do you think it is going to be very difficult to sell bank papers right now in the market, I know of one situation where the investors are very nervous.
A: I would say this. Market volatility is at the highest globally. If you see we had a good run of global funds coming in into Indian markets when the government announced the bank recapitalisation sometime in November. After that, India which was an underweight market started seeing large flows. There was good amount of paper, lined up in the first six months, obviously this kind of news and also global meltdown more than anything is going to make people think about the new paper that comes in to the market but I will 100 percent tell you that in this market, good paper will always find investors because India is still on the growth path and what we should not be undermining that there – how many countries can boast of a 7 percent growth. So for good paper, you will find.
For example, we did Idea, it was a good deal, it was closer to 600 million odd deal and in a tough market, in a bombed out sector, there was a clear story and people did support a good story.
So I would say that there could be delays but the story needs to be well understood. Of course, to your point, if we resolve this resolution early, which I am sure RBI and MoF do realise and are working on it as we speak, it would do good to steady the market. I wouldn’t disagree on that point.
Q: There are investors for good papers, we have seen in the market but when the overall market condition is bearish then the investors get very cautious as well. We have seen that in the past now there was a focus on probably consolidation, correction, last year we were talking about it, is it finally here, the real meaningful correction in the Indian bull market, is it finally here and how deep do you think it I going to go?
A: India is no longer de-linked with the global markets. So the global markets itself are volatile and you have seen markets fall across the globe and India cannot be an exception. However, good you do, flows and redemptions follow the global sentiment. So that is one.
On the Indian markets in particular, is the story over? There could be some downside but people are also ignoring and our strategist, Sanjay Mookim just came out with a piece few days back - the third piece on transformation of India and there I would like to highlight two-three points. One is that demonetisation and GST impact on the worst end has already gone through. The upside is now going to come. Bank recapitalisation overall for the steadiness of the market is a must in my opinion. So the market from here, I don’t see a downside more than 8-9 percent at max and I think once we get around this initial worry, for good companies, even I am seeing buy orders on our desks even now as what my equity guys tell me.
Q: You said 8-10 percent correction from here, midcaps would take a deeper cut you think?
A: Midcaps have also run up so much. So whenever you retrace, you retrace from all the different pools of money. So I would not – many times most investors forget that everything that goes up can come down partly. So is the fall even after all this, going to be deeper than where we started? The answer is no. so clearly it shows that it is more a correction and not a change in sentiment.
Q: What do you think about the non-banking financial companies (NBFC) sector in particular and also the entire financial services basket minus the banks? Now that the banks are going through a crisis, do you think that it is given a kind of a floor to the fall in the overall financial services basket minus banks because they had run up most and most experts expected them to fall the most, but have they got a floor because of the kind of a scenario that the banks are seeing right now?
A: I think private banks have fallen more than what they need to. It is not just the Punjab National Bank (PNB) announcement but it is also how the provisioning is going to be done in the next 180 days and the clarification or the recognition around that analysts have talked down the stocks much more. I personally feel that the private sector banks, the leading ones definitely look good at this level. Coming to the NBFCs, again one of the things in transformation of India that we have talked about is about the affordable housing and these stocks as you know have run up quite a lot but our analysis shows that with the way we are focussing and the next growth story of India besides consumption will come from housing and affordable housing and the urbanisation of the rural areas because we are a service led economy. If you put all of this together, this sector had not reacted in the last five-six years. So, while year-on-year we may see that these prices are crazy and some correction may be due, I don’t think the story is yet over.
Q: So on the deal street then housing finance companies are extremely active like many other pockets of financial services space, how are you seeing the space develop going forward on M&A front and also on the equity market transactions?
A: I think it will be an active space. I don’t deny your conclusion, if I may say so, and I would also say that lot of microfinance companies etc are also connecting the whole paradigm in connecting the dots to see how the low middle class to middle class can be empowered and the spreads and also the organisation around this whole industry is the next big opportunity for us. So I do see there is lot of work being done. There again I would say policies and governance should come early so that there is a path led down. We have enough, the real estate regulatory authority (RERA) act has been very welcome but on the audit side, on the governance side, a lot more needs to be done.
Q: By the end of this calendar year, how do you see the entire landscape of financial services sector minus the banks because there is just so much talk of consolidation, insurance IPOs came in last year, that was the big theme now, consolidation in insurance is a big theme right now, everybody is talking to everybody and then there are AMC listings also coming in, is the entire landscape going to change by the end of this year, how do you see it?
A: For a growing economy, financial institutions have to grow because to spur growth, you do need finances and what we saw last year and if you recollect, we had talked about it at the insurance time where one of the things that I had said is bank in the whole fixed space used to be large. From public sector, it went to private sector then it used to oxalate amongst them and now we have added the insurance companies, now we have the mortgage companies, so the overall weight of financial sector in India will definitely continue to grow. There will always be cannibalisation on each other’s and there will be movements of where people will switch things.
On insurance, yes, there will be consolidations but valuations have to be realistic for consolidations to take place.
Q: That can be said about the housing finance companies also, certain deals are in the making right now and the buyers just find the valuation expectation too high?
A: As I said, there the valuation expectation is high but we have a different view, our research view and I would encourage you to read that. Our research view is that some of these valuations will continue to be high. There could be a slight correction but they will continue to be high.
On the insurance side, of course, as the insurance products need to grow, the next phase has to be different products on this. Asset management companies – I do think having dealt with them for many years, they have the highest ROEs, there is hardly any need for capital, electronification and demonetisation has definitely brought in a whole different era for them. They are becoming bigger and bigger.
Q: One big company is coming to the initial public offering (IPO) market.
A: That is true and the systematic investment plans (SIPs) are looking like many people have adopted SIPs as an investment opportunity, which for years people kept banging the table but people were not willing to go into it. So I hope part of the gold has replaced by SIPs.
Q: How big is your focus on the M&A advisories because in equity market transactions you have done a lot but is M&A something also you are focusing on for this year and which sectors?
A: Yes, we have also done one of the largest M&As this year too and of course a cross border talks are at the highest. I must say that the India-US relationships have continued to improve. So people are looking at us quite actively to acquire companies or do joint ventures (JVs).
Q: Which sectors are we talking about most which will be active in cross border?
A: Consumer sector is one of them where clearly there is a necessity. In JVs defence continues to be pretty active if I may say. Also, on some of the special commodities things like that, there is a two-way dialogue, which is happening because steel prices are looking good and of course one of the things, which can become an active market could be the distressed debt market, people are waiting for clarification, that could bring in some more money, which would increase our flows to India. One should not forget – REITs is going to become important in the coming months.
Q: Corporate social responsibility is also an integral part of every corporate house and every year you come up with a paper, which Dasra releases and you would decide on your CSR activities as well, so throw more light on this year’s paper and the findings of that?
A: This year’s paper is to say that why individually each of us as corporates can influence and redo our bit but as a community, how can we adopt common causes like food security, economic security, adolescent girls and interventions and how can we have a collaborative around that and then showcase and learn from the collaborative as you go along because you would do interventions, you would do different gatherings and see how on the ground we can make an influence.
So the collaborative is around adolescent girls, it is on four interventions. It is for the girl to continue being educated, continue to go to school, continue to have a late marriage and not be pregnant early. If we can go through 10 to 19 in this fashion and have more women, you will have a lot more confident India – I do believe in women power and the whole idea is that this collaborative - we are doing in Jharkhand, that is what Dasra has found as the most important area right now and we are working with four NGO partners, which will grow over a period of time and the idea is to see these interventions through these NGOs in all these different aspects that I talked about and then measure the impact and then influence the policy around it and then we have lot more on the table because we are living far off than what the reality is but India can become better, India’s gross domestic product (GDP) can become better, if we do interventions at the grass-root level.