IIFL bullish on private banks; ICICI, Axis, HDFC top picks

In an interview to CNBC-TV18 Rajiv Mehta of IIFL India said that the broking firm is bullish on Indian banking sector particularly private banks.

ICICI Bank, Axis Bank and HDFC are their top picks amongst large private banks. From midcaps, it is betting ING Vysya Bank. However, IIFL is not firmly bullish on any public sector lender except Indian Bank. Also read: TCS may continue to enjoy 10% premium over Infosys: IIFL Meanwhile, he expects Development Credit Bank and Axis Bank to post healthy earnings in third quarter. On the other hand, Punjab National Bank (PNB) may disappoint this time. Below is the edited transcript of his interview to CNBC-TV18 Q: What will you watch out for in Axis Bank? Do you have any concerns or will it be a positive set of numbers? A: I think overall the numbers will be pretty positive. We have said it in our note that a lot of wholesale funded banks will report robust numbers in the quarter. We have seen the wholesale rates going downwards since April. A large part of reprising of the bulk deposits would have happened in Q3. So, along with Axis Bank we are also expecting ICICI Bank, Yes Bank, IndusInd Bank. These are all a set of largely wholesale funded banks. It should deliver good numbers. Q: Anything you will worry about in terms of asset quality in Axis Bank? A: Not really and not even heard of. This argument has been true for the last six-seven quarters. Since the trend in deterioration of asset quality, Public Sector Undertaking (PSU) banks had started but private banks have been putting up pretty resilient show. So, there can be a case like Deccan Chronicle or some other accounts whose names are coming out in the media. However, they would not be so substantial to hurt the profitability of private banks in a material way, on a sustainable basis. It could be quarterly phenomena, but I don’t think one will see a trend which could sustain. Q: According to you the private sector should largely fair well, what about PSUs? You are expecting a weak set from Punjab National Bank (PNB). How worse could it be? A: It can't be worse than the previous quarter that is for sure. The point is that if you approach those numbers in the context of the price rise PNB has seen in the last couple of months, it can really cause a correction in the stock. So, given the expectations which are really setting high for PNB just before the numbers, it can disappoint those expectations. Talking in absolute terms, PNB could actually come out with a delinquency ratio. That could be uncomfortable. It could be in the range of 3-4 percent. _PAGEBREAK_ Q: So your best bank would be Bank of India (BOI)? A: In the PSU space we are cautious. We are following a bottom up approach. We think that among the larger banks, State Bank of India (SBI) would have some steam left to go upwards. As we have seen a lot of troublesome quarters in it in the past. At the same time among the smaller banks, we are bullish on Indian Overseas Bank. It is one of the preferred bets, if one has to play a high beta story amongst the PSU banking space. Q: What about the banks that are coming out with numbers tomorrow, South Indian Bank and Development Credit Bank (DCB), are you tracking both of them? A: We continue to be positive on DCB. We think the numbers will be good tomorrow. Again there is a large exposure to bulk funding for that particular bank as well. In DCB, if you look at sequentially also, the numbers and the profitability have been improving. So, DCB is one bank where we think there could be some upside in the medium term. Q: Reserve Bank of India (RBI) and Dr. Chakrabarty made it public when he gave a statement. What we know from RBI is that they are a little upset over these charges that banks tend to impose. Would this news itself make you think about the non-interest earnings of some banks? Would you worry at all? A: The non-interest income line has been already under pressure for a lot of PSU banks. For the private banks the transactions momentum has been moderating. Plus additionally if such things are put in place, this might restrict a bank to put charges on few events or things. Then it will just add to the moderation of that particular income line. Q: Your call on valuations at the moment? How are you positioned in terms of the portfolio of banks right now? A: Overall, we have a positive stance on banking and more on the private banks. We continue to like some of the larger banks like ICICI Bank. We have a target price of Rs 1350 on that stock. We also like Axis Bank, its stock can go to Rs 1650 in the next nine months. HDFC Bank continues to remain one of our better picks. On the midcap side we like ING Vysya Bank. We have been recommending that particular stock from Rs 370 onwards. It had a fantastic run in the last three-four months. The kind of re-rating potential it has, there is a lot more room left on the upside for this stock. Q: On the PSU front? A: We are not firmly bullish on any of the PSU banks except Indian Bank. SBI I really like at this point in time. However, this quarter’s numbers can throw some more light and add to our instincts as far as PSU banking is concerned.