Expect some housing incentives in Budget, prefer private over PSU banks: Macquarie’s Suresh Ganapathy

Macquarie Capital’s Suresh Ganapathy

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26 Aug, 2025 12:21

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Tax exemption on capital gains bonds is at a limit of Rs 50 lakh, and there has been a long-standing demand to extend that to Rs 1 crore. Suresh Ganapathy, Managing Director, Macquarie Capital, believes there is a possibility it will be addressed in the upcoming interim budget because real estate prices have gone up.

Ganapathy has been tracking the financial services sector for over two decades now. At the current juncture, he believes private sector banks are better placed than public sector banks. “Private sector banks are better in terms of digital banking, branch expansion, etc. Moreover, HDFC Bank is making life difficult for everybody in the system owing to merger-related needs,” he said.

Also Read: HDFC Bank faces tough task to deliver both on margins and costs: Suresh Ganapathy of Macquarie

Edited excerpts:

What are your expectations for the banking sector from the interim budget? Or do you think it's going to be a non-event?
I don’t expect too many announcements in this budget. There could possibly be further housing incentives or extensions of housing benefits from a taxation standpoint for the consumer. So at best, that is something I expect. Anyway, over the past few years, there has not been any capital allocation towards public sector banks because the health of the public sector banks has been pretty good. I think that trend will continue.

What are your expectations regarding housing incentives?
Nothing major. However, the tax exemption on capital gains bonds is at a limit of Rs 50 lakh, and there has been a long-standing demand to extend that to Rs 1 crore. There is a possibility that it gets extended because real estate prices have gone up. Currently, the interest exemption on housing loans is Rs 2 lakh. That might also be partially increased. So, basic tinkering like that.

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A few weeks ago, a government document on the merger of four public sector banks was doing the rounds. Do you anticipate any announcements on that front?
In the past, the government, may not directly but indirectly, has indicated that they would like to reduce the number of public sector banks and make them larger. Some of these PSU banks are still small, and therefore, merger is an inevitable option. It may not happen necessarily through a budget speech, but that's the medium-term goal of the government.

But why is that? If all the public sector banks have healthy asset quality now and no further capitalisation is needed from the government side…
Where are the people to run these organisations? The existing management is getting old. There’s a musical chair taking place within the PSU banks. A’s ED (executive director) is moving to B. B’s ED is switching to A. That's a big challenge over a long time.

And from the RBI’s perspective, it is easier to manage a few large ones than multiple small ones.

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So, what's your pecking order now? Private sector banks over PSU banks, what do you prefer?
We clearly prefer private sector banks over public sector banks. Look at the books over the past five years. PSU banks have lost market share and deposits — both CASA as well as term deposits. Anyway, they were losing market share on loans, and I think that will continue. The private sector banks are better in terms of digital banking, branch expansion, etc. Moreover, HDFC Bank is making life difficult for everybody in the system owing to merger-related needs. So, private sector banks will continue to grow faster than public sector banks.

Over the next six to 12 months, ECL (expected credit loss) guidelines will also come through, and private sector banks have better wherewithal to manage that compared to public sector banks.

And when the ECL guidelines kick in, will there be a sudden bump up in provisions for all banks?
The RBI has given a five-year amortisation period for all the banks in the system once these ECL provisions are quantified. To that extent, there is time for banks to digest the impact. Private sector banks have contingent provisions that they can use to tide over this change and, thus, are in a better position. However, stock markets react differently. The moment it comes through, there could be a sharp reaction.

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Is there any investment case for old banks, like Karnataka Bank or Federal Bank?
The thing about these old banks is that they are regionalised and localised. They are not pan-India. As long as they remain small and focus on their local markets, they have a basic level of strong customer franchise, and they keep getting those liabilities — all is good. They might not grow at 25-30 percent, but they can still grow around 14-15 percent and maintain profitability for the foreseeable future. They will never be in a position to topple the big private-sector banks.

But they should stay in the main domain areas where they have a better presence. For instance, City Union Bank in Tamil Nadu and Federal Bank in Kerala have a good catchment in terms of NRI customers. The niche is unlikely to be disrupted in a big way, and they can deliver moderate performance over the next four to five years.

Among private sector banks, what is your pecking order?
We believe the best earnings growth will occur next year amongst the frontline top private sector banks. We expect around 15-20 percent earnings growth. So, HDFC Bank, IndusInd Bank, and Axis Bank will be my top picks in the space.

Read Part 2 here

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