Public sector banks like Punjab National Bank, Union Bank of India and Allahabad Bank have seen stabilization and asset quality in the third quarter, which is reassuring for the entire PSU banking space.
In an interview to CNBC-TV18 Rajiv Mehta of IIFL reviewed the third quarter earnings of various public and private sector banks. Public sector banks like Punjab National Bank, Union Bank of India and Allahabad Bank have seen stabilization and asset quality in the third quarter, which is reassuring for the entire PSU banking space, he said.
Asset quality pressures for PSBs seem to be bottoming out, so people are shiting focus from private banks to public sector lenders. "People are looking at taking risk within PSU banks given their significantly discounted valuation and the kind of performance they have delivered in this season so far," Mehta elaborated.
He expects this trend to continue and a large part of incremental money is likely to get pumped into PSU banks than private banks now. However, the broking firm is not entirely bullish on PSBs.
From the private banks IIFL is bullish on ICICI Bank. "It is a buy for us for the past one to one and a half years. It remains so. We are looking at a nine month price target of Rs 1,350 on the stock."
Below is the edited transcript of Rajiv Mehta's interview with CNBC-TV18
Q: What have you made of the Reserve Bank of India's (RBI) guidelines on provisioning and what kind of an impact will it have on which bank?
A: The roadmap providing for the restructured assets going ahead was very much in line with what the few people articulated in the last six months as well as the monetary policy. They always wanted to reach a provisioning level of 5 percent on restructured assets over a period of time in a phased manner and that is what they have come out with.
So, in price, largely to an extent it was factored in. At the same time on cursory basis we have worked out the impact on our profit estimates in FY14 and FY15, the way in which provisioning will be increased and that could be in the range of 4-5 percent impact with the bottom-line level in FY14. It could be in the range of 8-9 percent in FY15.
Q: Despite the management showing consistent profits and structural strengths in the last many quarters, ICICI Bank is still trading at a discount to many of its peers like HDFC Bank, post the numbers would you recommend it as a buy at this level and how would you see this stock move?
A: It is a buy for us for the past one to one and a half years. It remains so. We are looking at a nine month price target of Rs 1,350 on the stock. The way the stock reacted yesterday post a very good bottom-line performance was that the quality of beat at the bottom-line was not that encouraging because a large part of the beat at the bottom-line came from treasury income.
Though on the asset quality front they continue to improve, but there was also a substantial write-off within the deductions at the gross NPA level. These couple of things did not enthused the market especially on the back that the stock has run up 10-15 percent before the numbers.
Q: Do you think things have turned around for PNB because they have reported an improvement in their asset quality, do you think it is sustainable or is it a one-off?
A: It seems so and we are also hoping so. We need to watch out for a couple of more quarters as far as PNB or any other PSU bank is concerned. The key highlight in the current earnings season by the PSU banks has been stabilization and asset quality. It is not only PNB but even Union Bank of India, Allahabad Bank reported a pretty stable asset quality. So that is reassuring for the entire PSU banking space.
For PNB, the management comment remains slightly cautious as far as the asset quality is concerned. Also within the PNB numbers if one looks at the fresh slippages in the quarter, they were elevated at 29-30 billion. Essentially, the contentment at the gross NPA level came from robust recoveries and upgradation. Till we see some more moderation and slippages in fresh delinquencies in the next two quarters, we cannot say whether we have entered a weaker phase of a credit cycle.
Q: What would your top picks be in the entire banking sector now, for a six months to one year time horizon? Do you think the time has come to move some money out of private sector banks and into PSU banks because like you mentioned, it seems like the asset quality pressures are bottoming out now?
A: That is already happening over the past couple of months. People are looking at taking risk within PSU banks given their significantly discounted valuation and the kind of performance they have delivered in this season so far. That risk taking within the sector would continue and a large part of incremental money would find its way into PSU banks than private banks at this point of time.
Q: Do you see the valuation gap between PSU as well as private banks narrowing after Q3 earnings?
A: It may happen so but before taking a sector wide call it is important to watch out individual banks, which is why we have been cautious on the PSU banking space as a whole.
We have been recommending only select banks where we think there is a confidence or there is at least some resilient shown by these banks or likely to be shown in the coming quarters. In that kind of a format we like SBI and Indian Bank, but we are not yet getting entirely bullish on the PSU space at this point in time.