Edelweiss helps decipher trends in Indian banking space

Anuj: Before we talk about the Public Sector Undertaking (PSU) banks a word on what is taking place in private sector banks today and the kind of big fall that we are seeing in the likes of Yes Bank and Axis Bank. You have done some study of private sector banks as well. Is there something to get worried about?

A: We have done the annual report analysis of private sector banks as such. So, would not want to comment on the volatility which has been there in the markets today. So, there is nothing specific to the banking sector as such. But as you highlighted in terms of our studies there have been few interesting trends which have come out on the annual report. So, it obviously not - say, impact the stocks in the near term but some structural trends which we have seen in few of the private banks.

Sonia: So let us take the banks one by one. What is the kind of trend that you have noticed in a bank like Yes Bank because that one has taken a big beating today and even this year Yes Bank has done nothing. In fact, if anything it has fallen about five percent or so. How do you approach that stock?

A Yes, when we are doing this annual report analysis three broad trends which needs to be looked at are: one, on the digital banking side. Second, in terms of movement on risk weighted assets and third, it is in terms of say, the focus on building granularity both on the deposit and on the asset side. So, when you look at Yes Bank particularly in terms of risk weighted assets it has to the asset base that has gone up a bit in FY15 but that has been, say, the stance from the management itself as they had got some money from equity raising. So they had picked up a few non-fund based exposure which are of short-term nature and they can get out of it once they see opportunity coming on the lending side. But as far as say, digital banking is concerned, they are in line with say, the initiatives which most of the other banks have also taken and in terms of granularity on advances and deposits that was again very clearly visible in the case of Yes Bank. So, now we are seeing deposits and advances, top 20, which gets reported, that is getting more granular in case of Yes Bank.

Anuj: Let us talk about the PSU banks as well. We have seen quite a bit of rerating in names like Bank of Baroda (BoB) in particular, even in State Bank of India (SBI). Of course today we have seen some profit booking but what is your call on some of these names from here on?

A: We have turned positive on state-owned banks in March. Looking at the government initiatives as well as say the regulatory support which is coming in, we thought that structural reforms are due to take place in most of the state-owned banks, particularly the leading ones like SBI and BoB. So the immediate steps in terms of MD and CEO appointment and also in terms of capital allocation - that is what the government has already announced. But what needs to be looked at is they have addressed say, the softer aspects which would impact the functioning of the banks from a longer-term perspective. So, be it in terms of the say, the performance based incentive wherein now they have the KPIs jotted down which have not been the case, say, in the previous decade. So, now they have a specific set of parameters on which they will be evaluated.

Secondly apart from say, the MD & CEO the other board members also with say, the functioning of the bank board bureau expected to kick in from say, April 1, 2016 you will see a more professional management out there in case of the state owned banks. Thirdly they have empowered state owned banks by lowering the government interference and at the same time they have made it much more accountable as well. So, this is where they are actually bridging the gap with the private banks and the banks with much more quality franchise which is like, say, BoB and SBI that continues to be our top pick in this space.