Do you think that from now we are looking at a sweet spot for banking where the worst is behind us and maybe good times will be here?
The banking sector has gone through ups and downs over the last six-seven months and it has been a relative underperformer in the market as well and the reason was the second Covid wave. The asset quality stress that was anticipated after that and results being not so great compared to some of the other sectors. Also, banking is one of the sectors which, even after the base effect, is showing single digit growth in terms of credit instruments whereas most other sectors are expected to show very healthy growth once the base effects plays out. So I guess that is the reason for banking underperformance over the past few months.
Looking ahead, if the Covid third wave does not happen, then surely banking looks to be on a sound footing on a fundamental basis. The latest data is showing some signs of uptick in credit growth. We were just talking about the corporate capex cycle picking up and even if the capex cycle does not pick up, we have seen corporates deleveraging India for four to five years and their balance sheets are as good as what they used to be before the financial crisis.
We feel corporate credit might pick up sooner than what the Street is expecting. Retail credit is growing steadily and another good sign is the real estate cycle picking up in India. Housing is such an important part of the household balance sheet. So if the real estate cycle picks up, then it bodes well for the banking sector as well. So overall, unless a severe third wave happens, we believe things will turn positive for the sector. The economy is looking good and valuations are in our favour since the sector has underperformed quite a lot over the past five-six months compared to the broader market.
We are making a case of corporate credit growth coming in. How would you play that? Across banks, what is the best place to capture that credit offtake and also would you now look at the banks that have more corporate books or retail books?
The distinction between corporate and retail credit has now disappeared between the large four or five banks except maybe one or two because what has happened is, in the last few years, most erstwhile corporate banks have also grown their retail books as there was no growth in corporate banking anyway.
Therefore today, balance sheets are largely between 60-40, 50-50 between retail and corporate in that order. So to play the fundamentals in banking, what we really like is the large private sector banks and some of the large PSUs as well. We like the larger banks over the mid-sized and smaller peers as these banks have great access to capital. They have been able to raise capital as and when they want from markets. They have provided good provisioning for the anticipated Covid stress and therefore balance sheets are also quite healthy.
Also, given the kind of technology changes that are happening in this sector and the kind of investments that are required in technology, we believe that these banks are the best place to partner with new fintechs and invest in technology and keep up with time. Therefore, large private sector banks and some large PSU banks are what we would recommend among banks.
The market is rerating banks for becoming fintechs and fintechs for becoming banks. Bajaj Finance is getting rerated because it is moving into a platform. Where is the middle path? Who do you think will be the eventual winner in this called platform/fintech adoptability?
I cannot talk about individual companies but as I have already said, it is the large banks with good operating profitability or the large finance companies where operating profitability is fairly high, that are well placed to capture this phenomenon of becoming a platform or investing in technology. What you need is access to talent, access to capital and a large customer base. The large entities in India have all these prerequisites; their customer base is fairly high, they can access great talent in terms of technology personnel as they are attractive places to work in. And they also have the data. So if there is any chance of some of these large banks or some of these entities to have a great plain technology, it has to be the larger banks and some of the larger NBFCs as well.
While we have seen fintech taking away some market value from banks in developed economies, in India, the scenario might be a little bit different because in India the banks have access to easy capital and therefore they can pick and choose partners and at some point also buy out some of these fintech firms if they think they are becoming a threat to their market share.
Also, these banks have a huge customer base and as long as they can analyse their customer base, cross sell and do data analytics, they are in a great position to partner or fight with some of these fintechs.
A couple of years ago, the buzzword was microfinance, then it was small banks or small microfinance companies which have become small finance banks. But that is the end of the financial space which is facing a crunch. Bandhan is struggling, Ujjivan is struggling, AU is struggling. What will happen to the SFB space?
There is no doubt a great opportunity in the bottom of the pyramid space and in some of the customer base that they are trying to address which is the urban poor, rural poor or small MSMEs and the stuff. So opportunity wise, I do not think there is any doubt of that in India. What has hampered them over the last few years is that macroeconomic shocks have happened at regular intervals. We had GST, demonetisation and then Covid. They haven’t really got a launching platform of steady three, four years which a new business requires to catapult itself.
That is one reason why these banks have not really done so well compared to some of the other entities. But we do believe that selectively, some of these have good managements, the right kind of talent, the technology partnerships and therefore some of them can create value given the opportunity size that exists in India.
Before turning into small finance banks, these banks were mostly microfinance entities which were actually dealing with a customer base for a long period of time. They have the know-how of how to deal with these customers. It is just that macro has not favoured them for the last four, five years and that has hampered them.
But one has to be selective and look at the right management pool, the right customer base. Pure microfinance business does suffer from its own ups and downs because when the cycle or things are going tough for them, these entities suffer a lot. Therefore we like SFBs more than pure microfinance entities because SFBs give a diverse profile compared to pure microfinance entities.
You run a firm or fund which in a sense is for financials. Given that five, six years ago the option to buy into financials was limited, you could only buy the three, four, five private banks and some small banks but now the space is expanding. There are AMCs, insurance companies. Do you see the flows which came into the traditional banking funds will get challenged because the mandate is to run a financial fund and the options to bet on the financial space are plenty?
I would say that is a good thing. We are getting more diversification in sectoral funds and sectoral funds are generally considered to be more volatile. So diversification reduces volatility. Also, as I said earlier, across the world some of the new business models like fintechs or platforms have created huge wealth for their investors and we anticipate the same to happen in India over the next two or five years as some of these businesses come into public markets.
Therefore from a flow point of view or from an investment point of view, we believe this is a great thing that has happened as investors are getting more options now within financial space as well as a technology angle. I would not call it a negative, I would call it a really good thing.
