What is your view on the second wave restrictions and lockdown impact on asset quality of lenders across the country?
From a sector perspective, we are quite bullish long-term. The banks’ balance sheets are probably in the best shape in the last two or three years; there’s no pressure on the margins. From 12-18-months’ perspective, it seems credit offtake will reach mid teens. For a long term structural story of India, premiumisation and penetration are the two themes and we believe financials is the best way to play it.
Having said that, in the near term with respect to the second wave, if we try to quantify on loan growth, we are probably looking at one quarter credit offtake going away with minimal impact on margins. From an asset quality perspective, even if things worsen, we expect the RBI and the central government to introduce measures this year like they had done last year. We do not really expect the bottom line to be a hit. In terms of earnings, purely based on credit offtake, we are talking about a 6% hit on banking earnings which we believe is pretty manageable. The impact should be manageable for the second wave.
Let us break down this sector into pockets and understand where we see more structural earnings growth going forward. There are private sector banks, large cap public sector banks, pricy NBFCs etc. Where do you see best earnings quality over the next 4-6 quarters?
It has to be private banks. They have multiple drivers for earnings and are positioned to aggressively grow purely because of the balance sheet, which is not the case with PSU banks barring one or two. Most PSU banks are still quite stretched from a balance sheet perspective and even the majority of NBFCs will have to be slightly cautious given the second Corona wave.
Private banks can change gears and go aggressive for gaining market share. Even from a digitisation perspective,
, , ICICI Bank and Kotak Mahindra are ahead in terms of mobile banking market share or in terms of competing with the best of fintech players in the country. So even from digitisation perspective and opex improvement, we would see it coming through for private banks as compared to public sector banks or NBFCs.
Also, coming to the asset quality, they are sitting on a good chunk of contingent provision in case things go bad from here. After June, it should be better and they will again be in a much better position to handle asset quality stress. So private banks would be best picks with respect to earnings growth.
Within the private sector banks, there are retail-oriented private sector banks like HDFC Bank and Kotak Mahindra Bank. Then there are corporate facing private sector banks. Where do you find more comfort in terms of quality of earnings versus valuations?
If you have a portfolio and you have to allocate a certain percentage, I still believe HDFC Bank or Kotak Mahindra Bank will probably get the maximum or a sizable allocation. Having said that, ICICI Bank and Axis Bank are not far behind when it comes to the retail push. So the pecking order would be HDFC Bank, Kotak, ICICI and Axis, going by the last 10-15 years’ track record. That also will have some weightage to play into the earnings growth. So HDFC Bank and Kotak Bank would be the prior picks, followed by Axis and ICICI in terms of stability of earnings.
You have a very good basket of NBFCs which are small home ownership plays like Repco etc. You also have rural oriented NBFCs like Mahindra Finance and urban ones like Bajaj Finance and LIC Housing & PNB Housing. What is the order of your preference?
Given the second Covid wave is here and among the most affected are Maharashtra and NCR which probably accounts for 15-25% of the loan book for most of the vehicle finance or even housing, I think this time the impact on vehicle finance could be pretty severe or at least more than that in housing finance companies. So that would be the least preferred right now. Housing finance is extremely attractive from a valuation perspective.
A stock like Repco is trading close to their liquidation value as is PNB Housing Finance. These two look pretty good and then there are the likes of Bajaj Finance which have a solid track record, great management, the focus on digitisation and fintech. That cannot be ignored. If we are talking about nominal GDP growth of 14-15% coming back, it is the likes of Bajaj Finance which will be one of the most among the diversified financials and give significantly high growth. So I would stick with Bajaj Finance followed by housing finance companies and then will come the auto finance companies.
Out of the entire portfolio, which are the two to three stocks which could give best returns over the next 12-18 months and give you most comfort in terms of quality of management?
I will pick HDFC Bank and also Axis Bank as a turnaround story. Also a bit of life insurance and so
. These three would be my three picks for the next 12 to 18 months.
