Sanju Verma backs PSU banks despite sub-par Q2 performance

In an interview to CNBC-TV18, Sanju Verma, MD & CEO, Violet Arch Capital Advisors spoke about the PSUs specifically, SBI which is releasing its results today. Verma tell us why inspite of PSUs not doing well he will still bet on SBI.

Below is an edited transcript of Sanju Verma’s interview on CNBC-TV18. Q: Let me start with State Bank of India (SBI); what is your sense of what will come today and how to approach SBI and the public sector banking set?
A: I think SBI is not going to surprise either on the positive or negative, it is going to be pretty much statuesque. We expect close to 54 percent jump year on year at the PAT level. I think PAT should come in between Rs 4300 to Rs 4400 crore.
The key thing to note obviously will be where the net interest margins stabilize, that should surprise on the positive. I am looking to see a number of somewhere between 3.5 to 3.65 percent, true - 40 percent of their deposit cost comes from retail deposits.
and other loans in the personal loan segment.But what will keep margins reined in, ideally the margin should be between 3.75 to 3.8- What will keep margins reined in is the fact that yield on advances particularly in the retail segment have also seen a decline. So, the NIMs will pretty much be taken care of to cut a long story short.
The interesting point that I will be looking to monitor is the slippages. Slippages will come in at anywhere between Rs 5,000 to Rs 6,000 crore. Don’t forget the first quarter of FY13 slippages were high at Rs 10,800 crore to be precise. So, sequentially slippages will decline. Restructured assets as a percent of advances will be on the higher side. Gross NPAs plus restructured advances as a percent of the loan book should come in between 9.5 to 10 percent.
Nothing positive either on the NPA, on the restructured front, positive surprise possibly on the net interest margin front. No big surprises on the treasury income front because yields really went down by just about 7 to 8 basis points in this quarter over the June quarter so, fee income may come in from other sources but certainly not from the bond portfolio.
I like SBI at this point in time because when you look at the profit number of a bank you obviously reduce the gross NPA number and then arrive at the profit number. For SBI to report a net interest income growth between 10-11 percent year on year, which they should be doing this quarter and to report a 50 percent plus growth in profit year on year and a 20 percent plus growth in profit quarter on quarter.
Despite the fact that they have a huge percentage of the loan book exposed towards NPAs we are vulnerable on that front. If the bank is consistently showing profit growth which is far higher than the industry average or even better than some of its private sector counter parts are still trading at a huge discount of 40 percent plus to pierce within the space. I think that speaks for a lot and it's a great value play at this point in time.
I know this sounds very clichéd but my sense is also like the banks because of the sudden change in attitude by the top management. They did a smart thing by telling Kingfisher which is the biggest source of their NPAs that bring in USD 1 billion of capital infusion and then let us discuss whether we want to take your case up for the CDR (corporate debt restructuring) cell or not. Because, when you put a corporate into the CDR, the corporate gets the leeway of getting easy repayment of its loans, there is a whole host of other concessions.
So the whole attitude, the aggression with which the management is approaching CDR cases, systemic issues, even the debate with respect to CRR. Don't forget that one of the biggest beneficiaries for every 25 bps reduction in CRR is SBI.
A 25 bps reduction in CRR adds something like Rs 240 crore to SBIs profits. And in the last 2-3 quarters CRR has fallen by 150 bps adding something like Rs 1500 crore to SBIs profits. Whereas increase in provisioning which has happened in the credit policy announced a few days back will shave off about Rs 250-300 crore off. So net-net SBI still stands to gain from the liquidity infusion that has happened.
So all this will bunch of together and given that the large bigger NPAs have been taken care of be it a Suzlon, be it Lanco Infra, be it Deccan or be it Kingfisher. Going forward things should look up and don't forget that SBI does not have any material exposure to SEB or discom related losses. So that's a huge positive for them and would certainly place my bets on.