For the banking and financial companies, year 2015 has been one of stable asset quality, but weak credit growth. Credit growth for 2015 is estimated at 11 percent.
Jignesh Shial, research analyst, IDBI Capital Markets feels public sector banks may find it easier to raise capital in 2015. He sees scope for a lot of consolidation in the private banking space, but not in PSU banks. He likes HDFC Bank the most among private banks and State Bank of India among public sector banks. He is also bullish on City Union Bank, Karur Vysya Bank and Federal Bank.
Below is the verbatim transcript of Jignesh Shial's interview with Anuj Singhal and Ekta Batra on CNBC-TV18.
Ekta: I am going to start by asking you about 2014 and the performance of public sector undertaking (PSU) banks in terms of asset quality. How would you rate them, was it worse, better or the same?
A: No, I would say it had been gradually improving. There have been some slippages but overall the performance has been relatively stable. The kind of numbers they were delivering in the previous fiscal, similar kind of numbers have been delivered even during the current fiscal. So rather than deteriorating further, it remained stable. There has been some rise in slippages but overall the trend had remained kind of similar to what it had been in the previous fiscal rather than improving which was expected by most of the analysts.
Anuj: We saw in 2014, the first half was clearly dominated only by private banks. In the second half we saw that the PSU banks make quite a bit of come back. What is your call? In 2015 do you think both will do well or do you think it will still be a private bank story at least to begin with?
A: Definitely, we expect overall banking sector as a whole could do better. Definitely there will be some picks or there will be some selective stocks that we like the most but overall if the economic turnaround, which is happening, in that case, the entire banking space would be at an advantage and whether it is private or PSU both would be definitely gaining out of this momentum. So it will not be only private or only PSU, it would be mix of both.
Ekta: One of the things that we will see going into 2015 will be the integration of the Kotak ING merger on the assumption that everything goes as per schedule. In your sense, what will be the integration issues that we might need to focus on and how will it impact the two stocks if that is the case?
A: We even discussed this on your channel and we appreciated the way Kotak acquired ING and we definitely feel this is a win-win situation for Kotak specifically. The issue that the consolidation could face is probably approval from shareholders - that is something that one needs to watch out for, what kind of approvals and deadline which the Kotak management has already specified, probably April 1, 2015 that is what they are trying to ramp up with the entire procedure and all. So how that particular thing takes place, that is something one needs to watch out for. Operationally, we only remain keen on watching how ING’s existing traditional SME accounts, how Kotak acquires it and how Kotak manages it, that is something as an analyst, I would be keenly watching out for, how that particular counter Kotak is able to manage.
Apart from that, ING had been a pretty stable bank and Kotak will not have much of an issue either on the management level or on the operational level for the bank.
Anuj: What is your pecking order of preference in the banking space in terms of your top three-four ideas?
A: We like HDFC Bank the most in the private banking space. We think it would be able to deliver. There have been certain FIPB issues that the bankers are likely to clear it very soon. But on the growth front, they are the frontrunners and they would be able to do pretty well even if they don’t have any existing legacy of existing stressed accounts and all so they would be able to definitely deliver well. Mix of wholesale to retail or corporate to retail is also pretty fine with HDFC Bank. So that remains our top pick. On the PSU space, we like SBI the most. We think it would be able to gear up in the economic turnaround side and would be one of the finest banks to go for. Among midcaps, we like the names like City Union Bank, Karur Vyasya or even in that case Federal Bank.
Anuj: How difficult will it be for PSU banks to raise capital in 2015 or easy maybe?
A: It won’t be definitely easy because there are a lot of other banks or even other institutions that are definitely coming out and raising funds. Definitely the investors also have to pick the best bet whichever is available but it will be relatively easier compared to what it used to be previously because economic turnaround is definitely going in favour of banks and with the major issue that banks were facing is definitely the credit pick up which is likely if things fall into place and GDP starts picking up. So in that case, they would be having some takers for them that won’t be much of an issue but relatively what time they come and what kind of other players who are also there to raise the money that is something else to watch out for. Overall there are definitely some takers from PSU banks considering the economic turnaround already in place.
Ekta: Could we see further consolidation? We saw the ING Kotak deal take place, any more even possibly in the PSU banking space or smaller private banks that you think will possibly rally incrementally on that news in 2015?
A: Going on a speculation side or giving names on it but we definitely believe for private sector banks there is a lot of scope on the consolidation side whereby large private or even foreign banks can acquire smaller private banks. For PSUs, it seems a little difficult at this point of time considering more of an operational issues or even employee base that has to merge and all, even the government clearances and all has to come up. So we don’t expect that to happen very soon in the PSU banking space but for private, we definitely think there could be a possibility or could be a trigger for smaller private sector banks. That is always beneficial for both the banks if the valuation is going absolutely correct.
Anuj: The most volatile stock this year in financials was IDFC. What is your call as it now makes a transition to bank?
A: Definitely it is one of the finest placed stocks at this point of time. The only issue that remains is how IDFC ropes up the branch, how the expansion happens and the kind of credit book growth that they are able to bring in. So simply you would be watching out for the retail credit growth, how they are able to rope in and that is something I am keen to watch out for because corporate lending book will not be much of an issue for IDFC at this point of time but how they grow retail and how they expand their branch network as well as how they gather the deposit franchise that is something one has to watch out for but for a long-term period, it is definitely one of the finest pick at this point of time.
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