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HDFC Bank | IndusInd | DCB: RBI allowing promoters to have 26% stake to benefit HDFC Bank, IndusInd & DCB: Siji Philip, BFSI News, ET BFSI

Banking & Finance

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“RBI has remained silent on the NBFCs getting converted into banks and also large corporates getting more into the banking game. We feel that the RBI is taking a more calibrated approach and looking at how NBFCs are getting attuned to larger scale regulations which were announced earlier,” says Siji Philip, Senior Research Analyst, Axis Securities.

The RBI’s new circular on bank ownership has come out allowing 26% stake to promoters. Already reports are coming in of the Hindujas looking at increasing their stake in IndusInd and a $1.1 billion financial chest for that sense being readied; HDFC Limited now has headroom when it comes to HDFC Bank. Bandhan Bank there could see action as well. Your view?.
Whatever steps were announced on Friday in terms of the promoter shareholding definitely is a positive because there was uncertainty and some expectations were building up. Raising the promoter stake from 15% to 26% would definitely be a positive, more specifically for banks like IndusInd where the promoters have earlier shared their intention of increasing their stake. In the case of HDFC Bank, HDFC Limited can increase its stake, Aga Khan promoters can raise their stake in DCB. So for these kinds of banks, it is definitely a positive step.

There are certain guidelines which have been announced and the recommendations are on track on gradual calibration with the entire financial industry. RBI has remained silent on the NBFCs getting converted into banks and also large corporates getting more into the banking game. We feel that the RBI is taking a more calibrated approach and looking at how NBFCs are getting attuned to larger scale regulations which were announced earlier.

RBI clearly is still reluctant on issuing bank licenses to large corporates. To add to that, payment banks are also allowed to convert into SFBs but only after a gap of almost five years. With large numbers of fintechs and SFBs now, is there a need to issue more licenses?
We feel that RBI has always been about granting banking licenses and if the payment banks get listed, definitely a watch period is required to see how things pan out, how the entire financial system gets attuned to the various new entities which are coming in with the likes of fintechs.

Just a three-year proposal, which was given in the earlier recommendation, would be considered a slightly shorter duration compared to a five-year duration where one can see the gradual working and how it plays out in the financial system. That would be one of the key reasons why the five-year period has been kept rather than switching to a three-year period.



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Raamdeo Agrawal | Stocks to buy: PSU banks or private sector banks or fintechs? Raamdeo Agrawal explains, BFSI News, ET BFSI

Personal Finance

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PSU banks are good trade but if I want to buy and hold for 10 years, I would go for private sector and some big PSU banks. But the real finance sector game is going to be private sector banks and that too some of the newer private sector banks where book is very small say Rs 20,000, 30,000, 40,000 crore, says Raamdeo Agrawal, Chairman, Motilal Oswal Financial Services.

Where would you put the entire PSU pack? Is it going to be a pool which is going to give you parabolic returns, is it a pool which is going to give you low return or no returns? The government’s conviction about Air India privatisation and how quickly the disinvestment secretary corrected the convenience fee faux pas in IRCTC in less than 12 hours, what is your view on PSUs?
Yes, that is a positive aspect of that entire incident. PSUs are wonderful companies — mostly monopolistic or duopolistic. They are dominant players in the economy and their underlying value is very high if there is a bit of entrepreneurship and hands off approach to these companies.

The PSUs as a basket should give at least the market return. I do not think it will underperform the way it underperformed in the last 10 years and there is a good chance that it might even outperform because the valuations have been completely pessimistic even till date so as the economy recovers because they are mostly not export oriented. They are proxies to the Indian economy. I think they will do well if the policy remains encouraging and there is no interference in their affairs. I am quite sure eventually some optimism will come back in their counters. A little bit of rerating from 7-8 PE multiple to a 9-10 can take care of their market performance or even a bit of outperformance.

Also Read: Bull run is getting bigger! There are 70 million bulls in the market now

What should be the best way to participate in the financial space? Currently there are two very diverse views in the market. One view is supporting the comeback in PSU banks and one view is favouring technology and fintechs?
Fintech has a niche typically in unsecured lending and mass lending — 5,000, 10,000, 100,000 buy today pay tomorrow or buy now pay later. Basically it is unsecured. The moment you talk about security, you have to go on the ground and become non-digital; taking care of the collateral is a non-digital process mostly. So, that is a one small segment.

I do not think mainstream banking is yet threatened by fintech companies broadly. In mainstream banking there is a public sector, there is a private sector. In the next two-three years, when the economy recovers and the credit cycle changes and credit cost cycle goes in the reverse, public sector banks will also do well. But they are a trade in the sense they are good till the recovery process is complete. That may be the next two years-three years. When the credit cost is the lowest, they will show the highest profit but after that, they will keep losing the market share to private sector banks. But private sector banks are not as cheap as the public sector banks right now.

So if I want to buy and hold for 10 years, I would rather buy private sector and at the margin some public sector banks like the big ones one. They are trading at below one book and then after that, real finance sector game is going to be private sector banks and that too some of the newer private sector banks where book is very small say 20,000, 30,000, 40,000 crore. They can grow at a rapid pace in a given opportunity.



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Reliance Securities’ CEO says equities could gain another 10% by end of fiscal year, BFSI News, ET BFSI

Personal Finance

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As far as Indian equity markets are concerned, the million-dollar question is valuations. Benchmark indices have soared so far this year and remain near lifetime highs. Last week UBS gave a pessimistic view on how much further equity indices could climb and speculation is rife that indices are set for a correction. Lav Chaturvedi, Chief Executive Officer and Executive Director, Reliance Securities, believes that there is an upside of 10 per cent by the end of the financial year. In a candid chat with ETMarkets.com, Chaturvedi explains his rationale. Edited excerpts:

My first question is about valuations. Nifty, Sensex both are at lifetime highs. Are valuations stretched? How much of an upside are you seeing for benchmark indices?
There are two aspects to it. I want to summarise and then I will answer your question specifically. Overall on the one year forward earning basis, the market is at around 30-35% premium which is from 18x to 23x. That is the multiple that we are at. However, having said that, there are still some components which are included in benchmark Nifty in recent years like HDFC Life, SBI Life, Shree Cements carry higher P/E multiple than excluded stocks. Hence, a part of the premium has come from there. Further, improved visibility of earnings rebound post second wave of Covid-19 resulted in higher premium for the market and also from the market cap to GDP perspective.

We further note that the spread between G-Sec yield and Nifty earnings yield has gone up to historical average of 190bps, which may be a cause of concern for the near term. Overall though, the markets have run up and from here on, we would probably see another 10% jump towards the fiscal year end. That is something that we see. There could be some corrections along the way, the journey will have some blips but overall whoever is invested probably will see around 10% to 15% from here on a year-to-year basis.

From the perspective of a midcap versus small cap or a large cap; which part do you think right now holds the most value?
It is in the front end. We have seen significant growth in the largecap stocks. But it is going to be more broad-based and the midcap and smallcap stocks will probably continue the momentum given improved visibility of sustained earnings growth. However, in addition to earnings growth, investors must focus on cash flow generation and corporate governance of companies.

There will always be specific stocks and specific opportunities within the indices will probably provide opportunity and corrections will provide an entry level and another opportunity for anyone in retail or anybody who would have not entered so far.

Notably, every bull phase creates some winners, which causes midcaps to turn into largecaps. We already have many examples like Shree Cement, Tata Consumers, Avenue Supermarts, Adani Ports, Divi’s Lab, SBI Cards, among others.

There has been a flurry of IPOs so far in the year. What are the challenges of valuing these new age entrants into the market?
In 2019, from around $2.5 billion in the primary market (which is IPO) to almost $12 billion so far in 2021, it has been a phenomenal journey. LIC and Paytm are among others that could come in this year. So clearly it is a year of fundraising.

A year when a lot of primary activity is happening is very good because that provides risk capital.

The valuations with regards to overall IPOs or more specifically new age companies will probably be the function of what has been expected and what the investment horizon is. Clearly, if one goes for LIC IPO versus the Zomato or Paytm IPO will be on a completely different perspective. While LIC IPO is on today’s base and some growth rate in future, the new age technologies like Paytm or Zomato will probably be more based upon a little longer term.

Whoever is in it for the long haul…these kinds of IPOs will definitely benefit them. However, there are some players who are not for the long term. Probably more conventional IPOs will be better for them.

What is the earnings season telling us so far? Is the financial sector out of the woods in terms of asset quality?
Earnings so far have been decent and hence the markets are doing well. However, input cost inflation turned out to be a key concern for the market in the last couple of days.

With regards to whether the asset quality is out of the woods or not, the financial stability report from RBI says that it may take around four to six quarters for banks or for the lending companies to recover from the complete impact of any recession or any significant event like Covid-19.

So far so good but I would like to keep an eye on this for another couple of quarters at least so that we can see how it is going to pan out but all the policy responses that have been done so far both on the monetary and fiscal space have been supportive.

But we have another couple of quarters to look out for.

We have seen that so far this month the rupee has taken quite a beating because of a combination of factors; we have oil prices, we have the US Fed talking about tapering etc. Some companies like those in the IT space could benefit from this but what are the broader market implications of depreciation of the rupee?
The rupee usually is a function of two main components; one is the internal policies — how are the interest rates and second are the external fund flows and the liquidity in addition to the crude and other commodity prices.

There was an interesting article that says that the option strike in the US is going as far as above $200 for the Brent crude. It is phenomenal to even read that.

Obviously in the near term, crude probably has an upward trajectory till some correction is brought in by OPEC.

There are two key things that are going to play for currency in the near term future; one will be what steps Fed takes to taper or in what form and fashion.

That will probably determine the liquidity flow and that is where the currency play will come.

And the second is how the local interest rates or the domestic interest rates pan out. These two combinations will probably see where the rupee goes from here. Overall, it may be hovering around the range on a bit of a weakening but it is not going to be too much.

It is going to be around the range depending on what Fed does and how the domestic interest rates pan out.

Recently even the Bank of England governor has been talking about tightening monetary policy. The Fed has given a clear timeline that by November, bond purchases will be tapered. In terms of FII flows coming into India, do you think there would be a meaningful impact once all of this starts out in the advanced economies?
As we have seen in the past, tapering in itself does not cause the reverse fund flows. It is more if something is done beyond expectations.

Whatever has already been priced in or already been considered will not cause any impact on the FIIs.

If something is done over and above what has been expected, there may be some impact. However, the good part is that India being a strong story and robust inflow; that will probably offset some of those reversals because of interest rate arbitrage or the currency.

So overall, we do not expect on a more structural basis FPIs or FIIs flows to be reversed.

Yes, there could be some few months here and there, there could be some correction based upon the event but overall we should be okay.

We have been seeing a lot of talk recently about inclusion of India’s bonds in global indices. RBI has been talking about it. Many research reports including big foreign brokerages have been talking about it. Would that be a game changer for Indian financial markets?
I personally believe it will be and if you would have noticed, there was a recent comment by the deputy governor also that inclusion of the Indian bonds in the global indices in a way is a journey towards the capital account convertibility.

That kind of the roadmap that we are heading toward is very transformational for India to have a foreign flow like that. But it comes with its own impact and as long as that has been managed, I it is going to be a big, big plus for a country like India where there will be a debt fund and infrastructure funding and a lot of that positive funds will probably flow in.

We just have to ensure that the ecosystem has been addressed in a way where we are ready for the capital account convertibility which we have been speaking about for a long time.

In the last policy, the RBI kept interest rates unchanged but it stopped its government security acquisition programme and increased the size of its variable rate reverse repos. Some have taken that as a precursor to some degree of normalisation. Do you think that RBI could run the risk of falling behind the curve if it does not do something like a reverse repo hike by December?
I personally do not believe so. Whatever is being done is along the lines of expectation. There are a lot of reports out there that actually forecast when the interest rate cycle by the central bank will start normalising to pre-Covid level.

A timeline of over the next 12 to 18 months is probably a reasonable timeline because we have to see that it is not just the price stability but it is also about the economy and the growth which needs to be balanced. Anything which is done prematurely on one dimension has an impact on the other dimensions as well?
Yes 100% India will be. I personally believe that India will be both in top 5 and top 3 with regard to the best performing market. The only thing we have to see is that hopefully it will be on a dollar basis because that is where the currency will come into play and that probably will be a much more robust story and I do believe even there we have a fair chance.



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Federal Bank | Jhunjhunwala stock: Q2 was good; expect momentum to be strong Q3 onwards: Shyam Srinivasan, BFSI News, ET BFSI

Banking & Finance

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“Our platform is strong, our fintech arrangements are robust and improving and we will keep investing into that,” says Shyam Srinivasan, MD & CEO, Federal Bank.

Tell us a little bit about how the second quarter looked overall.
Q2 was a good quarter for Federal Bank. All of us know that the biggest test for a bank in very challenging times is the quality of the credit and I am quite pleased. For many quarters, we have been quite consistent about the underwriting and it is interesting that in a time like this, it shows up as a good portfolio. Our slippages were low and the recovery upgrades were higher than the slippages in this quarter. So, we had a writeback in provisions and there was no credit provision. Having said that, we increased our standard asset provision for the stress book or the restructured book. We just prudently built up coverage over a period of time.

Credit growth was modest. Deposit growth was excellent. Savings growth was excellent. Our other income did very well. So many bricks that we have been laying over many quarters are beginning to show up well. The most satisfying part is that in challenging times, we came out better than what many expected of us. It gives us confidence that we can perform even better from here. So on balance, Q2 was a good platform to spring into growth. Hopefully India and the economy is on a trend up. We think we can tap into that and start gaining share, which we have been doing consistently and hopefully Q3 onwards the trajectory and the momentum is strong.

How are the recoveries shaping up and how they are likely to pan out going forward?
I would think the earlier signs of a recovering economy are two things – one is how is our existing client servicing and their dues, particularly on products that are extremely important to them like home loans and vehicle loans; the second is how consumption is playing out. Both are showing good signs of recovery. People were clearing their dues and we saw a good pick up in retail and small business momentum. These are usually signs of optimism and activity happening in the economy. There are pockets like contact businesses which are still going through their own challenges,

I would say on balance there is a positive trend and as Gati Shakti and other big developments start kicking into the country and long-term infra kicks in, we would see even corporate credit growing. Once that goes, that snowballs into incremental growth across the chain. We have to be a little watchful of how the next two-three quarters play out but early signs of recovery are visible through better consumption, particularly in new-age segments. The recovery upgrades have been strong and one can see spends going up.

Debit card spends have picked up back to pre-pandemic levels. I would think the signs of recovering a healing economy is visible and suddenly with well over 100 crore people vaccinated at least one time, the worst fear probably is behind us.

Could you give us a sense of how that credit growth is likely to shape up? Do you anticipate it to be significantly higher based on the uptick in the consumption economy?
We should look at two things in credit growth; one is the aggregate credit growth which still is in the 6-7% year-on-year. But if one disaggregates the credit growth and looks at how some segments are growing, one begins to see pick up in retail, in small businesses as well as commercial banking. It is only the large ticket corporate credits that have not picked up. But that is heavily led by corporates who have access to cheaper money through other instruments and that is not showing as credit growth.

Second is that as the investment cycle picks up and which could be two to three quarters out, credit will come back to early teens.

How are you looking at the ROA as well as the ROE?
Firstly let me begin with digital. You have probably been watching our digital progress. I am not talking about digital in terms of the number of transactions that are digital; that is now a given and it is well over 80-85%. But what is important is how we as a bank have chosen to work with digital. We chose fintech partnerships as a very meaningful part of our incremental growth and we went out and created a super technology architecture which enables fintechs to plug and play with us fast. We have tied up with a couple of new banks, we have arrangements with some of the best brokerage houses, credit card platforms. All of that are beginning to give us momentum on new business building.

As I mentioned in our investor call, well over three lakh accounts have been built on the newer bank platforms. Of course, these are early days. There has been only 90-1,000 days since this started growing but it is evident that that platform is working and customers are able to onboard themselves literally unaided.

So the fintech journey of the bank is well and truly on and certainly in the passage of time, that will only get better. We are well capitalised. Thankfully our credit quality holds back. We grew 10% year-on-year in the first half and I would think the second half usually tends to be better. So, it should get somewhere in the early teens but we will have to watch out how the next two quarters play out. We are more optimistic about the opportunities ahead. Our platform is strong, our fintech arrangements are robust and improving and we will keep investing into that.



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Shanti Ekambaram, BFSI News, ET BFSI

Banking & Finance

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The primary market, which is the developer market, is also seeing movement. Maybe in the second phase of the pandemic, people were going for finished properties. Now, we are beginning to see demand even in the primary properties for very good quality builders, says Shanti Ekambaram, President – Consumer Banking, Kotak Mahindra Bank.
Going into the festive season, what is the mood vis-a-vis the revival in the real estate market? Banks like yours and SBI are trying to woo people who take home loans and personal loans.
July and August data show that consumption is coming back very strongly and this is across all categories — home loans and consumer durables or personal loans. Suddenly discretionary buying as well as specific consumption is back. Given the confluence of demand for home loans and availability of real estate — consumers have started going for the price that the developers are offering and people have the need and the ability to buy a larger home across cities — we decided to lower home loan interest rate for the festive season starting from September 10 till November 8. That is a win-win for the customer. Of course, now it is the Shradh period, but then the festive season of navratri, Dussehra and Diwali will take place. People were conservative last year, especially following Covid. But as business sentiment improves, the customer business is doing well and the jobs market is improving. So, there is a little bit of a feel good factor and we are supporting our customers by helping them to invest well. Their consumption is our business and we are seeing them consuming.

Home loan rate is at 6.5% and linked to credit worthiness. So, a consumer with a good credit score gets a better rate. What is the strategy at play? It’s Shradh right now you and home sales won’t take place. So what is the strategy?
The cities are really seeing demand, whether it is Bengaluru, Hyderabad or Pune. There is a demand in the IT sector and there is a demand for hiring in the technology space. We are seeing a lot of companies come back to the job market. The salaried are certainly a big area of focus. It is a much easier segment to perform. Second, there is a very large home loan stock in the market, still at reasonable high prices. We are looking for quality customers. The primary market, which is the developer market, is also seeing movement. Maybe in the second phase of the pandemic, people were going for finished properties. Now, we are beginning to see demand even in the primary properties for very good quality builders.

We are also focusing on the primary market. We want to build this business and we believe in a separate way to build a long term book as well as get quality customers to help us do many more things with those customers, We have a full strategy of getting the salaried people, getting the balanced transfer market, the primary market and of course we continue to look at other segments. We are going full steam on the distribution, of partnerships with developers and we hope that the demand in the next 60 days, as the festival season goes on, along with this very attractive rate will spur customers to make that investment on new homes.

Could you slice up the home loan demand for us and tell us where exactly is it coming in, what the ticket size of the loans are and if they are more or less comparable to what we have seen in the past? Is there anything that is standing out to you in terms of the home loans and also are people switching to Kotak Bank?
We are seeing demand in the whole space. We are seeing demand at the Rs 40-50 lakh level, we are seeing demand at the Rs 75 lakh level, we are also seeing demand at the Rs 5 crore and Rs 10 crore. People are buying bigger homes and in the cities of Mumbai and Delhi, the ticket size is obviously higher. But in the other cities — be it Ahmedabad, Pune, Bengaluru and Hyderabad, particularly Chennai, to a certain extent it is at around Rs 40-50 lakh, right up to Rs 2 crore.

So we are seeing expansion in demand in the entire price range. This is because right from salaried to business customers, different segments are recovering and we can see a slow uptick in the economy.

The primary market actually is the most interesting one because that is relatively under construction projects. Just coming out of Covid, even the second wave, people are preferring fully completed apartments. Even now, 50% plus prefer fully completed projects. But we are beginning to see a revival and that is good for developers in the segments where they are launching new projects.

Tell us about the other consumer segments like auto and consumer loans. Auto and white goods sellers say while volumes are a concern because of supply side issues, the value of products being sold is actually going up because of pent-up demand. Is that something that you are witnessing on the advances side as well?
The answer is yes. Along with home, we also see demand for goods within the house from existing and new buyers. In July and August, we started seeing the consumer finance space pick up quite significantly. Typically August, from Independence Day, right up to the end of the festive season sees a big rise in consumer finance or consumer durable finance. We saw that play out.

Interestingly, we saw it play out in July as well. It started in July. It picked up steam in August and for the Shraddha period in between, we will see a very good uptick. People are going in for better value and better products because maybe even work from home makes them want to have a better set up.

There is a demand for goods right across — whether it is laptops, washing machines, dishwashers or large format TVs, there is just a demand for a lot of goods and we have seen that uptick. So consumer finance has also started picking up and is a very interesting space.

Similarly personal loan which was a little muted has started picking up. I call it the consumption theme. Consumption has started and think there are many factors linked to it. Apart from just the job market, the general capital markets have been doing well. People have probably been making money, and the demand for consumption has started. That is a very interesting thing for retail financials particularly.

You are clearly targeting the good quality borrowers and that is why you are linking your rate with that score. How does that exactly work?
For the 6.5% home loan rate, we link it to credit score and by the way other banks have done it also. If you remember the corporate sector, the prime borrower rate is for prime customers. In the retail segment, a prime is what you call a score. The better your score, the better is the rate but it does not mean that you do not underwrite less than prime borrowers. There is an acceptable range of borrowers and we are not just going after that segment. We have a range of customers that we target and we structure those credits.

We are seeing demand from all kinds of segments but the prime rate is for the prime borrowers. Having said that, the differentials are not very much in the home loan industry, maybe 10 bps, 15 bps whatever. But we are seeing demand from right across the segment. We are seeing reasonably good credit flow across the customer segments.

The credit card market share of your bank is still low in relative terms. Are you looking at increasing the market share in this division? There are a couple of companies on the block as well.
The last two months have seen very strong spends by customers. The credit card business also grew after low spends by customers last year. We have seen a strong uptick in credit card spends. In the last 12 months we have done two big things. One we have actually introduced four new products in terms of making sure that we have the right product for the right customer right from the basic to the premium segment.

We have also upgraded our technology stack to the best in class. In the last two months, our credit card business has been growing month on month. This is a business we certainly intended to grow. We are ready for an uptick in the business.

The banking industry faced some issues in the retail MSME space due to Covid pressure placed on finances of individual borrowers. What is the approach in terms of quality for you in the near term? Will you continue to be cautious and are you sanguine about the quality of your book?
Covid has seen customers who were borderline in margin, facing trouble in the once in a century event. The quality of customers is far better. Also the collections data of the bank, the current demand efficiencies even during the second wave continue to remain good. The incremental quality of credit is reasonably good and so that is a good base to grow. MSME as a segment held out right through, thanks to the government’s liquidity scheme through ECLGS and it helped the customers during that time.

Take sector after sector, except for those badly hit by Covid which is travel and to a certain extent restaurants and pubs, etc, and hotel industry — most of the segments have bounced back and MSMEs are picking up the same demand and putting up capex. So the MSMEs thanks to the government’s initiatives, held a lot better in this period than the individual and the borderline cases.



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Vinay Sharma, BFSI News, ET BFSI

Banking & Finance

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We like 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 provide good provisioning for the anticipated Covid stress and the balance sheets are also quite healthy, says Vinay Sharma, Equity Fund Manager, Nippon India Mutual Fund.

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.



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Bharti Airtel | HDFC Bank: Would HDFC Bank, Bharti Airtel make good bets now? Sandip Sabharwal answers, BFSI News, ET BFSI

Banking & Finance

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If insurance stocks correct more, then they could give an opportunity for investors who are looking to invest for one or two years, says Sandip Sabharwal of asksandipsabharwal.com.

We have seen a bit of traction come by this week, specially in HDFC Life. There are two parts of this story in insurance as a whole — life and general. What is your take on the insurance stocks in India?
On one side, the long-term growth prospects are very strong because of the fact that insurance penetration in India is still suboptimal. It is not as suboptimal as it used to be a decade back but it still has a long way to go because there are still lots of uninsured people. Secondly, the way insurance was sold in the past and the changes that are getting made, are yet to play out. So that is one part of the story.

The second part of the insurance story has to do with the valuation story and the provisioning required because of Covid etc, which is event based and cannot be extrapolated because that does not impact the long-term mortality rate of the country.

But on valuations, these stocks are not cheap and that is the key issue. At this point of time, as far as insurance companies go, because the valuations of most of these companies — be it HDFC Life, ICICI Pru — which used to be cheap but is no longer cheap — or SBI Life are very expensive taking into account annualised premium equivalent or the new business premium into account, moving into the COVID hit quarter of last year.

Growth adjusted, these stocks are not cheap but they tend to be contrarian movers to the market. So when markets are weak, these stocks typically hold on and they do not do as well when the markets are moving up. In a corrective move, they could hold on but not absolute gain wise. I would still think that if these stocks correct more, then they could give an opportunity for investors who are looking to invest for one or two years.

For investors with a longer term horizon of say five to ten years, they will still make money even if they buy at these rates.

How do you think the market is reading into fundraising plans of Bharti Airtel? Seems like not quite well. looking at the price action in the stock today?
On one side, we have lots of IPOs getting lapped up at very high valuation. On the other side, we have a company which is actually on the verge of a growth cycle in earnings, where the market has not reacted well to its fundraising. That is fine. I would agree with the fact that fund raising by Bharti of a reasonable size could actually help it strengthen its balance sheet; secondly, gain market share in key segments and also get ready for 5G. The market is at an all-time high.

The Bharti Airtel stock went to a new high before correcting 5-6% from the top. So it is perfectly fine. I don’t think that it is a bad move. It depends on the way they are structuring whether they are getting in more money from Singtel or who is investing or whether it is going to be a QIP or rights issue. We still need to see these things but I would think that it is not a bad move to strengthen the balance sheet as the industry has gone through a very tough phase. The pricing discipline should come in but it has not yet come in.

The stock could obviously remain somewhat weak in the near term till the fund raising gets through but longer term the stock should do well.

What happens to banks? While ICICI Bank and SBI are showing leadership amongst the large banking names, HDFC Bank looks ready to play catch up then to ICICI Bank and SBI and form part of the leadership gang within banks?
The HDFC Bank stock performance will depend more on how the new management executes growth strategy and whether they can do it by managing the NPAs in a manner which was there under Aditya Puri’s leadership. The first signs over the last couple of quarters do not seem to indicate that and to that extent, it is an open competition. The challenge for most of the banks now are twofold; one, the overall credit growth in the system is just 6% and everyone is grappling for growth. So, some banks which were used to growing at 15-20% like HDFC Bank, how do they grow like that when the system wide growth is just 5-6% without taking risk as that could lead to an NPA spike. So that is a challenge.

The overall banking sector is challenged to that extent because there is no growth. There were initially some moves in a lot of these financial schemes because the NPA spike up due to the first wave of Covid was not as much as what people were expecting and the second wave actually has led to some NPA spike. So I would think that the overall financial space is at a stage where more consolidation is needed and it could still underperform as the markets correct.

In the case of HDFC Bank, they need to execute to retain the premium and for that, we will have to wait for two to three quarters. The initial bump up has happened as some restrictions got removed by RBI but that move is more or less through now. It will depend on growth and the NPA picture.



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Bajaj Finance | ICICI Bank: Hiren Ved is betting on Bajaj Finance and ICICI Bank. Here’s why, BFSI News, ET BFSI

Personal Finance

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We continue to be extremely bullish on the opening up trade. Whether it is hospitality, retail, consumer banks or real estate, there are a slew of sectors that can be played, says Hiren Ved, Co-Founder, CEO, Director, and CIO of Alchemy Capital Management.

You have been tracking very closely the ethanol opportunity. What kind of opportunity do you see for sugar companies, for players like Praj? Or is the best behind us given how steep the move has been in some of these stocks?
It is just beginning, it is not behind us. We are still seeing the early stages of adoption of ethanol in this country. We have accelerated the pace, very clearly the government is clear that they want to accelerate this space. The prime minister also mentioned about the focus that he wants to give hydrogen as a clean fuel.

In India, sugar companies are likely to turn into energy companies. Sugar is more likely to become a by-product and ethanol is likely to become a big product. But there are several layers of opportunity. What we are currently seeing is just a momentum in 1G ethanol which is the traditional sugar based ethanol. Where we see opportunities going ahead is when ethanol starts getting made out of food grains. As you know, we have a huge stock of foodgrains lying in our godowns and that is the next big opportunity that we see in terms of converting this extra food grain into ethanol and then biomass into ethanol.

Then there is a large opportunity for CBG. It is a medium term opportunity and still a little bit away but we are already starting to see the early signs of that and then there is hydrogen. The entire move to cleaner fuels, bio-fuels is a reality. The kind of climate change issues that we have seen around the world — the temperatures in Canada, the floods all around the world including Europe. The world is waking up to the fact that they need to move to greener fuels. The best is not behind us; it is just starting in my view.

How would you approach a stock like Bajaj Finance? It is at an all time high. The stock in a sense has been a great wealth creator for shareholders in the last 20 years. Do you think in the next three years, Bajaj Finance can give double digit returns and outperform the Nifty?
I think that the opportunity is significantly big and they have shown that they have been able to execute on that opportunity very well over the last few years. Financial services is undergoing a very silent revolution. It is one sector which is likely to be impacted by technology the most and if you look at the kind of soft infrastructure or digital infrastructure that India has laid out in terms of the UPI, payment companies etc. there is likely to be competition from all sides in financial services.

Apart from looking at a bank or an NBFC in a very traditional sense, like we used to evaluate them in the past when you look at if they are very strong on the liability side, asset side, credit underwriting standards, the most relevant is going to be all these trends plus digital capabilities. Amongst all the financial services companies that are listed today, in my opinion Bajaj Finance is way ahead of everybody. We saw what happened to the HDFC Bank stock price when they encountered digital issues and there was a moratorium by the RBI on issuing new credit cards. The stock underperformed for a long period of time. Now at least that part of the problem is over but going forward, we want to be invested in financial services companies which are ahead of the curve when it comes to digital adoption. Two companies make the cut — one is Bajaj Finance and the other is ICICI Bank, The rest follow.

How would you play the recovery and business normalcy? Would it be via the consumption facing names in retail, the entertainment and multiplexes stocks or through the construction industrial materials and metals and even real estate?
We firmly believe that there is significant upside in the so called opening up trade or consumer discretionary stocks and there are several ways to play that. One can play it through banks because in general, banks have been underperforming through the Covid period. So one of the opening up trade is banks. You mentioned real estate. We do not have a very significant exposure there but we are very closely looking at the opportunity in real estate. We believe that it is not just an opening up trade. After a long consolidation in that sector, we are seeing a significant uptick and that is the other way to play.

Thirdly, where we have exposure in a lot of big grocery retailers like Avenue Supermart, Trent, V-Mart. We are also very bullish on the QSR opportunity. We believe that all these opening up opportunities are significant. Many of these businesses have gotten more agile on the cost side; they have become more digital and their economics will only improve as things open up.

While incomes in the lower middle class and the rural areas have been hit, there has also been savings and as things open up, there will be a lot of pent up demand and spending is likely to come back with vengeance once we are through with the large part of the vaccination. So whether it is hospitality, retail, consumer banks or real estate, there are a slew of sectors that can be played. We continue to be extremely bullish on the opening up trade.

There is one more sector and one more stock which is in trouble and that is nothing to do with demand, it has got to do with availability. The semiconductor shortage has affected Tata Motors and now Maruti. Should one be a buyer in Tata Motors or Maruti?
Thus is a genuine constraint. Unfortunately it has come at a time when demand is so robust. Had there not been this issue, the sector would have been off the rockers but having said that, this may persist for maybe a quarter or two. Even OEMs are looking at alternative strategies.

We have to watch the situation. If the semiconductor issue gets resolved in a matter of few months, then there is a huge pent up demand in automotives and we believe that Tata Motors has done some phenomenal restructuring of the business both at the JLR end as well as on the domestic piece as well and today they are not only perceived but are actual leaders in the EV race in their passenger vehicle segment. A significant value creation can happen over the long run but investors will have to possibly live with some uncertainty in the short to medium term because of the semiconductor issue. But in the long run, we see a significant potential for rerating.



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Bajaj Finance | HDFC Bank: Does it make sense to buy Bajaj Finance, HDFC Bank now? Sandip Sabharwal answers, BFSI News, ET BFSI

Personal Finance

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A lot of the stocks which are moving up today are due to retail investment buying and speculative activity in the F&O market. We do not know how long it will go on. For Bajaj Finance to sustain these valuations, they need to grow at 40-50% continuously for the next four, five years in an economy where overall credit growth rate is 5-6%, says Sandip Sabharwal, analyst, asksandipsabharwal.com.

Bajaj Finance is becoming a platform company. It may become a front-ended platform company but the back-end would still be risk management, the NBFC business and the lending business. That is my view. Do you agree with it?
Yes. The overall technology edge is overestimated these days in my view because everyone has that technology now. Five years back, the technological edge was a story. Now it is more about innovation, how you sell your story and how you grow overall.

A lot of people talk about Bajaj Finance transformation. They are setting up all clients and all services together. But most of the banks are already doing that. I do not think that is a technological edge. I think the technological edge now is what you do and the stories will depend on how well you can execute those things.

Other than the big overhang of credit card issuances getting lifted from HDFC Bank, is there any reason to try and reallocate between ICICI Bank and HDFC Bank now?
Not so much. We need to remember that the last selloff which started in HDFC Bank was not related to the credit card, it was related to the spike in the NPAs which they saw in the last quarter and their asset quality is converging towards that of many of the other private sector banks. The credit card issue was an older one and that was as it is intact in the stock price for some time. That is the reason why this credit card ban being removed has not actually impacted the stock price so much. In anticipation of this itself, the stock has moved up by 5-6%. So I would think that the premium valuations which HDFC Bank used to enjoy because of the erstwhile CEO, the risk management and its consistent higher than market growth, no longer exists.

I would think that there will be a convergence of the valuations between HDFC Bank, ICICI Bank and other private banks which should continue unless and until we see HDFC Bank outperforming again in terms of asset quality. And we need to remember that HDFC and HDFC Bank are very heavily owned stocks and for them to outperform, they need to show something very distinct. Otherwise in most investor portfolios including FIIs, these stocks are very heavily over owned and for them to outperform becomes that much difficult.

Some would argue that this is a fair logic but this was a great logic at the beginning of the year when HDFC Bank was coming off years and years of outperformance and SBI’s years and years of underperformance. This year, the equation is different. SBI has given 50% return and HDFC Bank has been languishing. Is this relative valuation case true now also?
It does to some extent. If the HDFC Bank asset quality had not declined the way it declined over the last couple of quarters, then one would argue that what we are seeing is absolutely right but given the fact that they have seen a deterioration in asset quality, whereas other banks have actually ended up seeing some sort of recoveries and the asset quality has converged, then on a price to book valuation, the kind of premium HDFC Bank enjoys is tough to sustain.

In fact, Bajaj Finance now trades at some nine times price to book which is 180-190% premium to HDFC Bank, which is also very tough to sustain, given the kind of asset quality hit that NBFCs have seen over the last two quarters.

Why is anybody buying it? Price to book being expensive is not a restrictive factor for either foreigners or domestic investors to buy; retail cannot drive a stock like Bajaj Finance. why are markets ignoring that it is an expensive franchise, nine times book is like a crazy price to book which I have not seen even for illiquid names like Gruh Finance?
Yes, that is true but that always happens in significant huge up cycles or down cycles. For example, when Bajaj Finance took a beating at the same time last year, it was around Rs 2,000. We bought it near Rs 2,000 but exited it below Rs 4,000. The stock today is Rs 6,500. But at some point of time, valuations become restrictive. FIIs or domestic institutions’ flows have been quite muted in the last many days.

A lot of the stocks which are moving up today are due to retail investment buying and speculative activity in the F&O market. We do not know how long it will go on. For Bajaj Finance to sustain these valuations, they need to grow at 40-50% continuously for the next four, five years in an economy where overall credit growth rate is 5-6%. Also, Bajaj Finance is no longer a very small company, will they be able to do it? If they are able to do it, maybe the price will continue to trend up but I would find it tough to believe that they can do that.

We can say buy corporate banks because the capex cycle is there. But now big corporates are generating so much cash flow and the companies which need a lot of bank loans may not be going to banks to tap loans this time?
Many of the corporate banks which we used to talk about are now mixed bag. ICICI Bank is 57% retail now; HDFC Bank is looking towards corporate loans and in fact, in the last two, three quarters, a lot of their growth came from corporate loans. The entire space has got fuzzy ex of PSU banks where they do not have so much of a retail presence and to that extent they continue to be corporate banks. But as the economic activity picks up and working capital needs pick up, companies will find it tough to meet the entire capex out of internal accruals. So, some loans will be taken but the credit growth cycle might not be as it was in the past.

Now companies have the equity route, cash generation plus loans and so to that extent, the corporate loan growth cycle might not be as rapid as was seen earlier in the last capex cycle.

In the larger pool of financials, the same bifurcation or polarisation is happening within life insurance companies as well. What is SBI Life doing that other insurance players are not doing?
There are three or four plays and some stock outperforms. In the recent past, we have seen ICICI Prudential Life outperforming significantly, It had underperformed earlier when HDFC Life and SBI Life were doing better. There is cyclicality in their performances and also as the valuation differential becomes too high, those valuations correct.

I would think that longer term, many of these life insurance companies could actually perform very similarly.



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