The banking industry has been grappling with the impact of heightened NPAs over the last five years, says Joseph Thomas of Emkay Wealth Management.
The waters are expected to remain muddy for the BFSI sector in the near term as the slowdown will continue to fuel asset-quality issues. Over-cautiousness in lending on the part of the sector to safeguard itself will continue to create an overhang on the earnings, Joseph Thomas, Head of Research at Emkay Wealth Management, says in an interview to Moneycontrol's Sunil Shankar Matkar. Edited excerpts:
Q: Do you think we will report better growth in FY22, given the measures taken by the government and the current economic data points?
GDP growth registered a sharp contraction for Q1 of 2020-21 at 23.90 percent, a deep fall, the worst ever, which is the direct consequence of the pandemic and the lockdown. A fall close to -20 percent was more or less expected. Even with some improvement in the economic variables in the coming three quarters, the growth for the whole year is likely to be -8 percent to -9 percent. The probability of this number being revised is quite high given the fact that there have been practical difficulties around data collection and estimation on manufacturing and industries and consumer prices.
A revision will happen when data of smaller corporates and the informal sector are incorporated later. The probability of the numbers turning more adverse is quite high. Again, going by the expenditure side, the private Final Consumption Expenditure and Gross Fixed Capital formation contracted by -26.70 percent and -47 percent, respectively. Given these realities, it is likely that we may not see anything worse than this as we move into 21-22. It may take longer-than-expected time and would also require more measures. The numbers clearly indicate the need for a demand-led or consumption-led recovery, which is very crucial for the economy and it may require measures by which the disposable income of people is enhanced. Such measures must necessarily come from the fiscal side of the policy. But the difficulty is that the room available for the government is too limited at this moment.
Q: Do you think US elections are a major risk for India? What are the other factors that can hamper growth?
The US elections do not hold any major risks for India in the political or financial realm, as in almost all matters of secular importance successive American governments have followed the same or similar policies, whether it is foreign policy, defence or trade. Therefore, it is too much to expect from a change in the government.
There could be some changes in the approach to China as far as trade and tariffs are concerned. There could also be a shift in the approach to Europe as it could turn around for the better. The Fed regulates the economy and takes all important decisions regarding the economy and the financial system. The Fed has already signalled that they will follow an accommodative policy for an extended period of time. Therefore, the fundamental principles on which the economy is steered remain unchanged.
Q: What is your take on the banking sector, especially after the end of the moratorium period and the expected NPA issues?
The banking industry has been grappling with the impact of heightened NPAs over the last five years. The gross NPAs rose from 4.27 percent in 2015 to 9.08 percent by end of 2019, touching a high of 11.18 percent in 2018. The risks of further slippages are exacerbated by the COVID-19 situation. As per the latest Financial Stability Report of the RBI, the gross NPAs are expected to worsen to 12.5 percent by March 2021 as a base case scenario and to 14.7 percent for a stressed scenario. The expected rise in the gross NPAs, RBI initiating moratoriums, implementation and extension of loan restructuring facilities and setting up of an expert committee for selective restructuring on a sectoral basis are indicative of the existing and expected stress in the banking system. Not only banks but NBFCs, too, face similar challenges on their loan books. The waters are expected to remain muddy for the BFSI sector over the near term, as the slowdown in economic growth will continue to fuel asset-quality issues. The over cautiousness in lending on the part of the sector to safeguard itself would continue to create an overhang on the earnings. The credit growth has shrunk to close to 6 percent levels from the high of 15 percent seen in December 2018.
While the bank credit growth has lost pace, the commercial papers issuances have maintained their run rate, indicating the partial shift of credit demand from banking channels to capital markets. The conservative approach of banks and concurrent fall in market interest rates have led to top-rated borrowers preferring the bond market route. Even though the RBI has decided to maintain status quo on policy rates in its recent monetary policy, the focus on the transmission of the rate-cuts can create margin pressures. Given the concerns discussed above, the performance of the BFSI sector has been subdued as compared to the broader markets. On a YTD basis, the Nifty 50 is down by 5 percent, whereas the returns for the Nifty Bank Index are negative to the tune of more than 25 percent. The weightage of the banking sector in the Nifty 50 has come down from 30 percent at the start of 2020 to less than 23 percent. The limited contribution from the BFSI space has led to a scenario where even though the Nifty 50 valuations (P/E ratio) has touched all-time highs, the index is some distance away from registering new highs.
While the importance of the BFSI sector for the overall economic growth cannot be stressed enough, the contribution to the equity markets is equally important. The prospects of the BFSI sector remain as lucrative as any time during the past.
As the economic cycle turns, the demand for funds is expected to pick-up as well. Top-rated corporate buyers may have access to alternate modes of financing, but the larger section of the economy, especially MSMEs, look to their banking relationships for their funding requirements. A major sector with robust prospects but currently going through rough weather may warrant investor interest.
Q: Do you think India is going to be a major manufacturing and services hub in the coming years? What are the sectors that will benefit from this theme?
India has the potential to become a major hub for manufacturing and services if we work on bettering the infrastructure, both physical and financial, and also improve the ease of doing business. Infrastructure is the most important consideration and in the absence of that, no amount of government policies can work. There are significant opportunities held out by the adverse environment which China faces at this moment and it may last for a longer time.
A major opportunity was lost when the handing over of Hong Kong to China was completed by the UK. Quite a significant number of entities who wanted to move out of Hong Kong moved to Singapore and Dubai. Currently, there are US companies moving out of China but quite a large number of them have opted to relocate to the US. In manufacturing, there may be some advantages in pharma, specialty chemicals, manufacture of heavy capital goods, etc that can be capitalised at this juncture. But to be the first choice of overseas manufacturers and investors, we have a long way to go before we can seriously claim we are an attractive destination.
Q: Do you expect more FPIs/FDI to come into India after a raft of measures and incentives were offered by the government?
We have seen good inflows through FDI in the last three months and the FPI inflows have also been positive in the last couple of months. The FDI inflows are a direct result of attractive opportunities that are available to overseas investors from a long-term investment perspective. However, in FPIs, we may see a shorter engagement and the Fed's decision to continue an accommodative policy and infuse liquidity into the system for a prolonged period may attract some funds into emerging markets, including India. These funds look at differential returns and also a currency gain while investing into centres and currencies other than their local ones. Overseas funds will continue to be selective in their investment choices until the pandemic dies down and normal activity resumes.
Q: Do you expect more inflows into small and midcaps after Sebi tweaked norms for multicap funds? What could be the major reason behind it and do you expect more such changes from Sebi?
The circular states that, "In order to diversify the underlying investments of multicap funds across the large, mid and smallcap companies and be true to label, it has been decided to partially modify the scheme characteristics of multicap fund." Until now the funds under the multicap category were free to allocate the portfolio in stocks across the market cap spectrum without any restrictions. The new circular mandates these funds to have at least 25 percent allocation each to large, mid and smallcap companies; in effect bringing 75 percent of the allocation.
The average allocation to largecap, midcap and smallcap stocks currently stands at 74 percent, 16 percent and 6 percent, respectively. This means that the largecap exposure needs to be trimmed in the favour of midcaps and smallcaps. The likely amount to be re-allocated is close to Rs 35,000 crore. And this may benefit midcaps and smallcaps.
At the same time, it may be noted that the fund houses have the freedom to convert the multicap schemes into flexi-cap or thematic funds and thereby change the very complexion of the funds. So, it is left to each individual fund house to act in such a way that the interests of the investors are looked after. It will definitely improve the sentiment towards mid and smallcaps, and we may see some amount of allocation coming into them, by way of tactical allocation.Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.