From the sidelines of 10th annual UBS India conference, Vishal Goyal, BFSI analyst - India, UBS believes the FII interest has jumped in Indian public sector banks.
However, from the private banking space, he likes HDFC Bank as he feels the stock will outperform despite underperforming in the beta rally. From the NBFC space, he prefers LIC Housing Finance over Mahindra.
Meanwhile, there has been a buzz in the market about Kotak Mahindra Bank acquiring ING Vysya Bank. If the deal goes through, both the companies would benefit making it a win-win situation, he says in an interview to CNBC-TV18.
Below is the verbatim transcript of the interview:
Q: What is the sense you are getting about the bank stocks? It’s been the pillars of support for the Nifty do you think that it is getting to over valued today?
A: When you look at the near term stock rally, there can always be consolidation. I don’t think there are still in the over valued zone even if you look at state owned banks and private banks for example state owned banks are still trading below their historical averages so they are no where near over valuation zone. In private banks case there is some amount of fair valuation which is coming through now because they are trading like one standard division above their averages so you can argue that they may be consolidating here. However, I don’t think we are anywhere in over valuation zone from valuation perspective.
Q: Do you see a deal happening between Kotak Mahindra Bank as well as ING Vysya Bank and if does happen would you be a buyer?
A: Deal is been due for quite sometime. Almost both the parties have kept saying that they want to do something like seller wants to sell, buyer wants to buy. It is the most logical guess right now I have no other information on the same and unfortunately, we don’t even cover the name so I can’t comment on that also.
Q: What are your favourites in the private banking space?
A: We like HDFC Bank a lot at this point in time. It is underperformed also its peers, there is this FII ownership issue which I am sure will get resolved at some stage which is more about HDFC limited being a foreign company but even if it is not resolved the deceleration which you saw in the company especially from the growth point of view from 30 percent to 20 percent is already behind.
As you see economic activity pick up you will see growth for them also accelerating their current account, saving account (CASA) also further improving, their fee income also picking up. So I see them going back to 25-30 percent growth rate and that is when the re-rating will happen for them. So, that is one stock which is kind of underperformed in this beta rally and should be looked at this point because even if let say we were to believe in consolidation at current levels then that stock will outperform.
Q: Do you have any models to check how much a stock may fall when mandatorily FIIs can’t buy that stock. Do you think by those standards HDFC Bank could have more falls simply because the liquidity will dry out a bit?
A: We tried looking at this data and it is not very predictable for example, when Axis Bank FII limit got over and especially when it was removed form MSCI obviously there was a fall because there were obviously sellers. However, when the FII limit was full after that point in time like the FII limit was full at Rs 800 stock price of Axis Bank and now you know the split price where it is close to Rs 2,500 or something like that. FII limit is a mental barrier for investor because they had to take that FII premium hit upfront in the Net Asset Value (NAVs) but that doesn’t stop the stock especially you view a six months plus in that horizon you still make money even if it is FII.
Q: What happens to HDFC Bank Plans Rs 10,000 crore of funding rising in light of limited FII headroom?
A: My limited view on that is it should move further progress. That deal should happen may be in next month to six months that is our understanding because now at least they have got this FIPB approval above the 74 percent so what they can logically do in my view is that 74 percent they can still raise from foreigners and rest 25-30 percent that can raise from domestic.
Q: In the NBFC categories, UBS likes an LIC Housing Finance while you are cautious on Mahindra and Mahindra Financial. Now both the stocks have moved perfectly in line with your recommendations and LIC Housing Finance is up 85 percent this year while M&M Financial is down 5 percent so far in 2014. Do you think that trade will still play out?
A: There is some more room to that trade and most of it is played out but the reason I might still like an LIC over Mahindra. LIC Housing Finance has no asset quality problems so far because they are 97 percent mortgaged. So, even if let say in next six months we don’t see a credible recovery in CV cycle etc, LIC Housing Finance will still have zeroish NPA and still 16-18 percent kind of a loan growth which I think will be difficult for other asset financials. Biggest benefit that can be visible of rate cycle will be on LIC Housing because they are wholesaler borrowers and on the fixed rate side, they have fixed rate loans as well. They will benefit on the margin side as well.
Q: In your own analysis what is your view towards PSU banks? What price do you have and in the conference when you spoke to FII investors if you did what is the impression you are getting? Are they willing to take a look into PSU banks?
A: There is a huge increase in interest in PSU banks and that is definitely in the conference when I am sitting with my investors there is lot of meetings taken up for SBI versus I am comparing with last conference so there is huge interest. That is the answer to the first question whether investors are looking at PSU banks I think there is in the conference and outside the conference also when we get in coming request for conference calls or meeting there is jump in interest that is one.
On PSUs, we like SBI and the key reason is management stability. There is a management which is going to be there for at least next one to two year plus they have tier I capital of 10 percent. Management is focusing on right things like maintaining the stabilising operating expenditure (OPEX), maintaining margins, asset quality I don’t think is in their control right now because it is more a macro play but whenever asset quality turns from here they all will benefit.
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