MSF unwind: Play Yes Bank, IndusInd Bank says Religare

Although the timing of this Marginal Standing Facility (MSF) rate cut was a surprise, it was on the expected line post the last monetary policy where they had cut it by 75 basis points, says banking analyst Siddharth Teli of Religare Capital Markets. This means at the shorter end of the yield curve the rate should come down, he adds in an interview to CNBC-TV18.

According to him if one were to play the MSF unwind trade then it would be through Yes Bank, IndusInd Bank, where they have a buy because they expect wholesale funding rate to come down, and non-banking financial corporations (NBFCs), where they do not see asset quality pressures. Key ideas over there are Bajaj Finance and M&M Financial. However. they are not as constructive on Axis Bank and ICICI Bank because over there they sill continue to see pressure on corporate asset quality. Among the public sector undertaking (PSU) banks their top picks are State Bank of India (SBI) and Bank of Baroda, adds Teli. Below is the verbatim transcript of his interview on CNBC-TV18. Q: How have you read the up move that we have seen in most of the banking space and more importantly what would you do now? A: This was expected, the unwinding of Marginal Standing Facility (MSF) was expected after the last policy where they had cut it by 75 bps. The timing came in as some bit of surprise though but nevertheless what it means is that at the shorter end of the yield curve the rate should come down. Clearly is to benefit banks who are largely wholesale funded. We had recently come out with a report wherein, whilst we are not very positive on the sector, we have buy rating on names like Yes Bank, Indus Ind Bank, to an extent based on our thesis that wholesale funding rates will start coming down on the basis of MSF unwind. That is something that we would still want to play at this point in time specifically for names like Yes Bank and IndusInd Bank. Our sense is that Yes Bank did up base rates after the MSF rates were initially upped by 300 bps. So, assuming they don't cut base rates now for some time to come, and given that MSF has been already unwound by 125 bps, our sense is that the disruption in margins might not be as pronounced as thought earlier. Valuations too are still attractive, so I think we will stay put with Yes Bank, Indus Ind Bank. However, within this space we do not have buy ratings on Axis Bank and ICICI Bank at this point in time. We believe that corporate asset quality will still continue to remain under pressure for them. Q: What is your view on PSU banks, many of them have valuations certainly going for them? A: In terms of PSU banks our top-rated ideas at this point in time are State Bank of India (SBI) and Bank of Baroda (BoB). Our key worry is that asset quality concerns continue but we have done an exercise where we are rather reducing 50 percent of FY14 NPLs of the networth and then trying to see what could be the capital dilution required for these banks to get back to 8 percent kind of levels. We believe that banks which are capital starved, while they look very good on valuations the valuation differential will continue. Our call on PSU banks is a) these are more of a macro play rather than bottom up stories at this point in time, so not very sanguine on this space. That said, we prefer BoB in this space simply because it is better capitalized. For example if I were to compare BoB with somebody like Union Bank of India or Bank of India, then with plus 10 percent tier I capital I don't foresee any capital raised for them even if I were to adjust their entire net NPLs to the networth for FY14. Whereas, if I were to do that for Bank of India or Union Bank, the kind of hit that I see on net worth is meaningful. And then to get back to 8 percent, the dilutions could be as high at current market price they could be as high as 60 percent for these names. So, we would stay away from those names. Our key names over there are SBI and BoB. That said a caveat here in terms of numbers we are not seeing any meaningful declines in NPLs in this quarter vis-à-vis last quarter. So we do not see these stocks run away at this point in time. Q: Your view on Non-bank financial companies (NBFCs) that is the other space which has started moving well of late. A: There will be liquidity that will be supplied in the market even as at the higher end of the yield curve we might not see as much respite, because our call is there will be repo rate hikes. So, if you were to play the MSF unwind trade it is through Yes Bank, Indus Ind Bank and to an extent through the NBFCs. From a numbers standpoint, we believe that NBFCs we are not seeing any meaningful asset quality pressures. Although we will see some slowdown as far as growth rates are concerned, given liquidity was tight and most NBFCs currently want to fund it out of their collections rather than borrowing at high rates. So growth rates will come down but asset quality pressures will most likely not be there. Therefore, we remain constructive on that space. Our key ideas there are Mahindra & Mahindra Financial Services, we are also buyers in Bajaj Finance and at relatively lower valuations we would probably look at mortgage financiers.