'RBI may cut 25 bps tomorrow; need more govt action on banks'

Bank shares have remained a pain point for the stock market over the past one year -- beset by NPA issues and weak credit demand -- and the pain is likely to continue for a while, says Andrew Holland of Ambit Investment Advisors.

In an interview with CNBC-TV18, Holland said he expects more downgrades for names such as SBI and even a private sector lender such as ICICI could see its asset growth drag on for yet another quarter.

He lamented that the Finance Minister could have "done a lot more" to clean up the banking system. On the positive side, he said the Reserve Bank could cut repo rate by 25 basis points, something that could surprise the market.

Below is the verbatim transcript of Andrew Holland's interview with Reema Tendulkar & Sonia Shenoy on CNBC-TV18.Sonia: I am sure all the bulls are saying thank god, January is over but what about February, we have the big Budget, the mood is still very sour, what are your expectations?A: I suppose we have got quite a number of factors there. One is from the local standpoint, we have the Reserve Bank of India (RBI) tomorrow and I am twp thoughts for that, one is that from his interview in Davos that the RBI governor is saying that he does have room for more rate cuts going forward. But then again some of the commentary over the weekend about fiscal prudence pretty weak to last to the Budget -- he has the ability to go tomorrow, if he wants to, for 25 basis points (bps). So it depends on how he wants to bring way for the Budget and see what the government do in terms of spending and the fiscal prudence which he is probably wanting. I guess the biggest disappointment for me has been one of the things the RBI governor has done is kind of name and shame corporates which are obviously causing the banking sector a lot of problems but that hasn’t been followed through by the finance minister. I think he could have done a lot more there to help the banking sector through some of these problems.So we could have a good backdrop in the interest of the run up to the Budget because globally now people are thinking that what the Japanese Central Bank did could be followed by the European Central Bank (ECB) in March and that could keep the liquidity tap open. It is a bit more risky what the Japanese Central Bank did. It is saying we are going to do whatever it takes and they said they wouldn’t go to the negative rates but here we have them going towards negative rates.So does it mean that Fed had a missed up in December and therefore interest rates aren’t going to rise in the US so quickly. So that liquidity expectations at least for the next month could be good for our markets.Reema: What have you made of the earnings season so far? Is it tracking in line with your expectations and which were the companies that positively and negatively surprised you?A: I think you have done a great analysis the whole negatives and positives but generally I am seeing from the last quarter and this quarter, that improvement across different industries in terms of operating margins, I think where the disappointment still lies is obviously the topline growth because India is all about operational gearing. So as and when the economy starts moving ahead, we should get topline growth.So I will not say I am overly disappointed, I think if anything I would continue to be encouraged by the fact that companies are containing costs, repairing the balance sheets in this difficult period and using these lower commodity prices globally to expand margins at the operating level, so far so good.Sonia: It is so far so good for a couple of pockets but not so good for a couple of these banking names. ICICI Bank is the biggest loser this morning, down another 3 percent and I think the complaint is to do with lack of disclosures for some of these banks like ICICI. As an investor, as a long-term holder in this stock what would you do now?A: We have probably got one more quarter of pain and we are slightly confused because the RBI has a list of corporates and we are not sure who is providing or not providing and it is a bit confusing in that respect. I think that is why if we don’t feel that any bank has disclosed properly then we just take in that the worst is going to happen going forward and therefore we are getting a rerating of the stocks. There is also downgrade to a lot of the banking sector, I believe there is a downgrade to State Bank of India (SBI) today. But again going by what I said originally that I think the finance minister could have done a lot more to help the RBI and the banking sector but he just hasn’t taken any kind of step to the banking management at all and nothing has changed.Sonia: In that backdrop since you are saying that the Finance Minister could have done a lot more, are we setting the stage for a disappointment in the Budget this time around?A: As usual, the Budget expectations will grow and grow as we go forward and there is expectation that there will be more push towards the rural economy to try and that get kick-started after two poor monsoons.However, you can have many different policies for many different sectors but if you cannot move forward as we have seen even on the roads, we have got problems there. You just need to get this bottlenecks sorted out and it is all surrounded by the banking sector.Reema: What have you made of Larsen and Toubro's earnings, is that a stock that you like at current levels and you would recommend?A: It has been beaten down obviously because everyone has taken the view that with the Middle East problems and the oil prices, that is going to be a huge negative. I think they surprised positively on the upside both in terms of the earnings was downwards, did better than people expected and the orderbook was strong. However, it all goes back to execution and it is great to have an order book but if you don’t execute or the projects are being stalled then it is not going to do very much so we go by the same problem what I am saying is that until the banking sector clear its problems and some big changes in terms of management are seen then we just around in this kind of problem of nothing moving forward very quickly.Sonia: Wanted your thoughts on the overall market texture itself. At what point do you expect the market to see a recovery and in the next six months or by the end of 2016, where do you think the Nifty withstand?A: What I will say is that given the global backdrop, which could be more liquidity driven and I am not saying that that is not a risky proposition but obviously it will help markets get through this difficult period, which we have already been seeing but there will be periods of volatility and they are going to be quite harsh as you saw in January.So in the next few months, that might see more favourable backdrop to global markets. So that is going to help us in the very short-term but obviously if we are going to have to see what the picture is to see how we go forward in terms of the Indian economy and that in terms of all difficulties that we have, I think some reforms have to get through now for the Indian story to continue to capture foreign investors a favour.It is not out of favour at the moment, I think we are getting close to people saying that we are not seeing any real movement, it is a great solid economy but it is better valuations elsewhere. So I think that is the short-term kind of problem India faces with foreign investors. The only thing I will be thinking is where the China goes in this scenario and I still think that China has to do some fiscal stimulus. That is quite interesting that this number that China has, if Japan comes with liquidity driven monetary policy and so does ECB which is obviously going to help depreciate that currency shift is welcomed by the markets but if China does this, it is not. So I think I have to do some fiscal stimulus to assure that the economy is going to grow at that new target of 6.5 percent over the next few years. If that happens then you would see a better backdrop for the Indian markets but I think if earnings can grow anywhere towards 10 percent this year then probably that is where the markets can move during the course of the year.(Copy edited by Nazim Khan, interview transcribed by Sonal Jadhav)