Parag Jariwala, VP - Institutional Research, Banking and Financial Services, Religare Capital Markets in an interview to CNBC-TV18 spoke about earnings from banking sectors.Amongst private banks he prefers Axis Bank over ICICI Bank because for Axis the stress asset formation would be half of ICICI, loan growth would be around 18-19 percent compared to 14-15 percent for ICICI and profitability too would be better for Axis.It would be wise to wait for a clear trend to emerge in public sector banking space.According to him there is no reason to be excited with Bank of Baroda slippage number because it could be an aberration and the total stress formation is still high for the bank.
He is eagerly awaiting the SBI fourth quarter numbers.
Below is the transcript of Parag Jariwala’s interview with Anuj Singhal and Ekta Batra on CNBC-TV18.Anuj: Really have to start with Bank of Baroda; the kind of numbers that it came out with and the kind of surge on the earnings stake. Where do you stand on that particular stock now?A: The market were really excited about the numbers on the day when the results were out but I do not think that there is any reason to get over-excited about. Because barring the broad line or a head line slippage number, there is nothing very encouraging, if one were to look at the credit costs, at the margins and even the loan growth. So, slippages could be a quarterly phenomena or one-off kind of an event.
However, the total stress formation is still very high and with the restructuring window getting over on FY15, in first quarter, FY16, you may see stress asset formation rise this time and so the slippages number could be much higher than what they reported in fourth quarter.
So, with regards to the entire public sector (PSU) banking space, it is wise to wait for a clear trend to emerge on the broader economic performance and broad based recovery. Till that time it is best to avoid PSU banks at these levels.Ekta: You seem to have downgraded Punjab National Bank (PNB), Union Bank as well as Bank of Baroda. For Union Bank in particular, what is it that you not like?A: I agree that this quarter numbers were slightly better than the earlier quarters. But if you see their quarterly performance then second quarter was reasonably good, then third quarter they again disappointed, then now the fourth quarter is again good. So, the variation in terms of slippages or stress asset formation for the Union Bank on a quarterly basis could be 30-40 percent either way, which is disturbing.
Second thing what we do not like about the bank is their capital positions, 7.3 percent of tier one is something on the lower side of at least the front line PSU bank and they will keep requiring capital or dilution every year. And now with government clearly indicating that they are going to fund only the top eight to ten best performing banks, this bank may have no option but either cut down their loan growth or rely on the markets to raise capital. That would be very painful process and definitely negative for the minority shareholders.Anuj: What about the big ones: State Bank of India? What is your call on that particular stock now?A: I would be eager to wait for the fourth quarter results but they have really performed well, so far as the front line stress asset formation is concerned. So, peak was around Rs 19,000 crore of stress asset formation on a quarterly basis and they have steadily declined to a reasonable level of around Rs 10,000 crore. So, very good set of numbers as the asset quality is concerned.
The banks has done reasonably well in terms of margins, in terms of the operating costs. But again I do not think that credit cost number for FY16 could come down materially. Also on a loan growth it would be much lower not only for State Bank but also for the system as a whole. So, yes, I am eagerly awaiting for the fourth quarter numbers and then we can decide on the clear trend for the bank.
Ekta: What about the private banking space? Because Axis as well as ICICI Bank, their guidance in terms of FY16 said that maybe stressed assets would be better than FY15. Between the two, which one do you prefer and which one do you think might sustain asset quality going into the next year?
A: If I have to choose between Axis and ICICI, I would clearly go with Axis at this moment. Both of them have guided lower asset quality pain in FY16 over FY15 but still in terms of stressed asset formation, Axis would be half of what ICICI will report in FY16. And also in terms of loan growth Axis can deliver anywhere closer to 18-20 percent growth while ICICI Bank would still struggle at below 14-15 percent.
In terms of profitability too, Axis is still better than ICICI. So, with all these three factors favouring Axis at current levels, it is a clear choice if I have to choose between them.
Ekta: One quick word with regards to a couple of these PSU banks, you did touch upon bank recapitalisation and the fact that a lot of these banks might need to tap the markets in order to shore up their capital adequacy ratios. But given the fact that maybe they will not be able to raise capital as easily in the markets do you then think that credit growth for a lot of these banks going into FY16 would be as subdued as FY15 or maybe it would be polarised? So, maybe valuations in a couple of PSU banks would increase simply because they have more sturdy capital adequacy ratios?
A: Definitely, if you have read the Crisil outlook published yesterday, for entire PSU bank as a whole they are talking about around 12 percent growth for the next three, four years as compared to their estimate of 17 percent earlier.
Therefore, the weaker banks will definitely see sub-10 percent kind of a loan growth for the next two years, maybe not even in FY16 but also in FY17 because remember that their ability to tap capital market at this moment when the credit cost is high, their valuations are subdued, is very limited.
So, they will have to get their house in order and it will take at least one and half to two years for them to come to a reasonable return on equity (ROE) kind of a level and reasonable asset quality performance before they can tap the capital markets. I will not be surprised if they grow two, three percent lower than the system growth in FY16.
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