Banks to do well in 2013; mkt-share, margins dim NBFCs: UBS

Vishal Goyal, executive director, UBS Securities, who has authored a report suggesting PSU banks need to work on bridging their valuation gap which is close to the highest levels ever seen, explains to CNBC-TV18 that banks will perform well in 2013 and adds that he does not favour NBFCs due to worries on loss of market-share and inability to maintain margins.

Below is an edited transcript of the analysis on CNBC-TV18. Q: Is this just a valuation argument that you are pushing or do you think there is genuine room for optimism in 2013 on asset quality issues which have plagued these stocks?
A: I think 2013 should be a better year for banks with the economic environment turning favourable in terms of pressure from NPL and ease in rate cycle. I think the government is clearly taking a lot of effort to stimulate demand and investment cycle and if it can successfully implement the National Investment Board (NIB) it would be a key stimulant for banks as well. Improvement in the capital market sentiment helps corporates trying to deleverage, try to sell assets or raise equity.
Lastly, if the Reserve Bank of India (RBI) starts to ease rates after looking at core inflation data, the economic environment would turn very favourable for banks in next year. Q: Which PSU banks do you favour? Over the last few days, the smaller public-sector banks which are trading at 0.6-0.7 times book-value have posted the most sharp rallies. So do you favour smaller public-sector banks or would you stick with their bigger counterparts?
A: It depends on the investors' appetite for liquidity of. Institutional investors would stick to bank-stocks like SBI and Punjab National Bank (PNB) which are much more liquid. At UBS, we screen bank-stocks into two groups- stocks that are trading well below their historical averages or close to their trough valuations such as PNB and Bank of India (BoI) which are roughly 50 percent below their historical averages.
Secondly, by taking into account the credit cost of banks. So banks which have incurred a high credit cost in FY12 and FY13, have a high base and therefore would have the highest earnings upgrades. Q: Do you feel confident that SBI will overcome its problems due to bad-debts?
A: I think the SBI is mirroring the economy's weakness. As we see improvement in economy, SBI's NPL slippage will definitely go down. It has shown a little improvement last quarter but there is a lot more room to improve.
With most of the NPAs due to the mid-corporate sector which has been the worst-hit due to the slowdown, I think any improvement in the economy should reduce the NPA levels in the next two-to-three quarters. Q: Do you also any potential for M&As in some of the smaller PSU banks?
A: Given economics, it makes sense to merge some of the smaller banks. I think M&A in private-sector banks is highly likely given the talk of increasing banking licences. Q: Why are you not particularly gung-ho on NBFCs though some of them have done quite well recently?
A: I think key issue with stocks like IDFC is that the stock is up 90 percent YTD (year-to-date). So, all the good news has been already priced in IDFC which is trading at 1.8 times. I have been favouring NBFCs like REC and PFC for sometime now on improving SEB sentiment. LIC Housing has disappointed on metrics especially on margins and its inability to manage margins is the key reason why it, along with other NBFCs, will find it difficult to operate as the business becomes increasingly competitive due to garnering of market-share by PSU-banks like SBI. Q: Do you think any of the NBFCs like L&T Finance are in a position to receive a banking licence?
A: According to the draft by the RBI, NBFCs like L&T Finance, Shriram and IDFC are sound candidates to receive a banking license. But the RBI is yet to issue the final guidelines. Q: Has there been any significant change in your outlook or rating on Axis Bank?
A: Not really. We have been neutral on the stock for sometime now as the reported stress is much lower than in the economy. We are neutral on the stock mainly because of the asset quality concerns which could arise in the coming quarters.