Banks asset quality may stabilise in 18 months: PhillipCap

“Banking stocks may not outperform, but they are likely to find support at current valuation levels”, he says.

Below is the verbatim transcript of Manish Agarwalla’s interview with Ekta Batra & Anuj Singhal on CNBC-TV18. Ekta: There has been a steep correction in terms of valuations as well as PSU bank in the past couple of weeks. How are you placed in terms of which stock looks best valued in terms of FY17 price to book value public or private or both? A: Recent correction is largely to do with lot of uncertainty in terms of book value going forward. If you look at the Central Banks comment that banks would need to clean up their balance sheet because of that I think there is a lot of uncertainty about how the valuations or book value will actually look going forward in next two years because we believe that there can be lot of non-performing assets (NPAs) or volatility on the quarter-on-quarter basis going forward.  Having said that the stocks which we continue to like whether in terms of valuation or whether in terms of asset quality would be Bank of Baroda (BOB), State Bank of India (SBI), Axis Bank and HDFC Bank. So, these are the four banks looks very interesting. We believe that the banks are trading below their historical median valuations and given the diversified books which all this entities have we feel lesser risk compared to peers.

Anuj: For ICICI Bank in particular it has been in such a strong bear grip now. What you think is going wrong with this and at what price is it a good buy? A: I would like to comment here that the exposure to leverage entity is something which has been a concern for ICICI Bank for some time now. We believe that in next one and a half year things should become much clear where the actual position of gross non-performing loans (GNPL) lies for most of the banks.  As far as ICICI Bank is concerned next one and a half year will be the year where we will see lot of cleansing up happening. If you ask me in terms of valuation I think today they are trading at much below their historical median valuations. So, probably these are the valuations where I think the banks would find a support but whether they will continue to outperform from the current levels I think next one and a half year would be very challenging.

Ekta: There has been an on-going dialogue with the Reserve Bank of India (RBI) as well as banks with regards to NPLs and the RBI’s target is possibly to get more clarity on gross NPLs by March 2017 and we could see some amount of more stringent provision norms possibly come in for the likes of the strategic debt restructuring (SDR) scheme. In that context your view on gross NPLs which one would be the most vulnerable and how bad could it get? A: So, definitely we might see some of larger exposure getting been recognised. We have seen certain instances in the past where few banks have taken recognition of some stress exposure whereas the same exposure remains standard in some other banks book. RBI’s has taken recognition of that and probably we will see symmetry in terms of how banks recognise NPA. So, probably there will be a lot of pressure on the bank to take a call if an account is a stressed in one banks book probably we might see the similar treatment by other banks because of which you will see a lot of volatility in next one and a half year.