Recapitalisation of PSBs without proper rules & conditions no good: Macquarie Cap

Suresh Ganapathy, Banking Analyst, Macquarie Capital Securities in an interview to CNBC-TV spoke on a host of issues – PSU bank recapitalisaion, earnings, IDFC-Shriram Group merger being called off, affordable housing segment etc.

Talking on recapitalisation, he said it is a step in the right direction because banks will be given solvency capital to write-off loans. However, recapitalistaion without consolidation and without structural reforms in PSBs, without board governance reference is pointless.

So, the government must ensure that recapitalisation comes with its own set of rules and conditions, which will help enhance efficiency and the overall performance of the board for all these banks, or else it will be difficult to get constructive on them, said Ganapathy.

Moreover, the PSU bank stocks have already rallied 25-50 percent, so it is already in the price, said Ganapathy.

Talking about Yes Bank earnings, he said they are disappointed and have downgraded the stock to neutral.  However, the business model which is built on aggressive recovery has not changed. With regards to the asset quality divergence, they have recovered almost 85 percent, he added.

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Suresh Ganapathy

Banking Analyst|Macquarie

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The problem with the bank is lack of transparency and effective communication, he said, adding that one could see de-rating in the stock and multiples could remain subdued for some time despite reporting similar profitability as to HDFC Bank.

Therefore, from a point of view of next 6 months, Yes Bank stock could remain subdued but from a 3-4 year perspective then even at this price it makes sense to add.

Analysing the PSB versus non-banking financial companies (NBFCs) argument, he says post-recapitalization the PSBs will lend more to corporates than retail and they don't have the wherewithal to do retail lending like auto or commercial vehicle lending. So, the domain and expertise of NBFCs will remain intact.

However, what could be challenging for the NBFCs would be the reversal in rate cycle and that could lead to sharp margin contraction for NBFCs, which the market does not seem to be pricing-in. Therefore, one needs to be cautious on NBFCs, especially the ones trading at very high valuations – like Bajaj Finance, Mahindra & Mahindra Financial Services.

Talking, about the merger between IDFC and Shriram Group being called off, he said it would be positive for Shriram Group, so the deal overhang on Shriram Transport is over now.

For the entire discussion, watch video