Macquarie maintains avoid on PSU banks

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26 Aug, 2025 12:21

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Ismael Pili of Macquarie is underweight on Indian banks compared to their Asian peers. The banking sector continued to grapple with NPA, mainly arising out of the power sector, even as the deteriorating state of the economy raises new concerns.

In this backdrop, Pili says PSU banks remain an “avoid” on capital news. Instead, he prefers ICICI Bank and HDFC Bank among the private sector banks.

Below is the edited transcript of his interview to CNBC-TV18.

Q: What was your reaction to the kind of news flow that you heard over the last 48 hours and did you change your rating on the StanChart Plc counter or on the IDR here?

A: It was very shocking to find out that USD 250 billion was being alleged transactions involving Iran. A 16% & 15% sell down in London and Hong Kong is a testament that it has surprised the investors. Yesterday, it again fell 7% in London.

I think large investors would be making a mistake by jumping into it thinking that the worst is over. Still, there is lot of uncertainty left regarding the size of the fine, suspension of its New York and US dollar clearing operations and whether there will be some reputational damage that would be inflected on the bank.

Q: StanChart says that Iranian transactions without compliance are only USD 14 million. Do you think the damage has been priced in and is it in the realm of sentiment right now or do you think there could be material downsides?

A: When the Hong Kong share price fell 15% it knocked off USD 9 billion off the market cap. People roughly estimate that StanChart could be imposed a fine of USD 9 million inferring from USD 700 million that HSBC has set aside against their own transactions with Iran worth USD 20 billion. So StanChart is roughly 12.5 times more.

In that regard it suggests that it should be in the price and I do concur that. A 15% selloff given the potential fine is reflected in the price. The only issue is whether it's cheap enough to bottom fish and to get back into the name.

Q: How are you positioned in the general Indian banking system relative to the peers in the Asian space now?

A: Right now we are underweight because the fundamentals are trying for the macro. We are going over by the twin deficits concerns on inflation and at the central level we are seeing top-line pressure on margins, asset quality and operating expenses. That has not worked.

The share price of the Indian bank they have held up well, but there seems to be a divergence between private banks versus PSUs. In the Indian banking space we would defiantly go for private banks lead by HDFC Bank and ICICI Bank.

Q: You would still stay away from the PSU banks despite the recent destruction in stock prices?

A: Yes, we have always held out for PSU banks that they would narrow the valuation divergence between themselves and the privates and that have been happening leading up to 2008 GFC, but post the GFC that divergence seems to be expanding and we a lot more pressure on the PSU side.

We are concerned by the pension provisions as well as the operating expenses side and there are worries that they may be required to raise more capital which becomes an overhang in itself and that would stymie any kind of price appreciation to narrow the gap between the prices.