“The corresponding quarter’s number was depressed by MTM losses as well as relatively lower disbursement velocity (fee driver) vis-à-vis the current one. With margins likely holding and mid-teens growth, we expect a robust quarter from SBI,” he says. The foreign brokerage firm has a target price of Rs 780 on the PSU bank stock.
In this interview with ETMarkets, Chakrabarti also talks about what investors can expect from banks in Q1, valuations and the impact of the mega merger of HDFC-HDFC Bank. Edited excerpts:
Do you think that margins are going to be the biggest stress point for banks in Q1 despite the good news coming from the credit growth side?
We expect the blended cost of funds to rise on fixed deposit (FD) repricing as recent higher-cost FDs incrementally form a larger part of NDTL, a phenomenon exacerbated by muted CASA growth. The bulk of floating-rate asset-side repricing also seems to be behind us – especially true for prime corporate loans, which, for all practical purposes, should automatically reprice to the lower of EBLR and MCLR. Consequently, we expect some moderation in NIMs in 1HFY24, with improvements starting to come in only as rate-cut expectations start getting built into borrowing costs (depends on when clarity/consensus on rate cycle reversal emerges).
As of now, some succor is available on margins from a pick-up in sentiments and therefore disbursement velocity in the relatively high-yield NBFC adjacent risk-on loan segments like CV/CE, micro-SME, rural, etc. These are inherently higher-yield segments and should provide incremental support to loan yields, in our view.
In your recent report, you have highlighted SBI as the top candidate for a positive earnings surprise. What makes you think so?
We expect SBI to spring a surprise in the current quarter mainly on account of non-interest income. The corresponding quarter’s number was depressed by MTM losses as well as relatively lower disbursement velocity (fee driver) vis-à-vis the current one. With margins likely holding and mid-teens growth, we expect a robust quarter from SBI.
How cheap are the valuations looking like at current levels in frontline banks?
With the exception of ICICI bank (which in some sense has had a major upgrade in the perceived robustness of its business model in the last five years), most frontline private banks are trading at or below their longer term median valuations on price to book value basis. Another additional comfort factor is quite simply the fact today’s book values are more ‘bankable’ in some sense than they were even five years back with full recognition of asset stress and provision in excess of the same. So, for the best part of comparable history, the denominator of the price to book ratio was probably at that point an economic overestimate, while the current number is probably an underestimate.
With the merger of HDFC Bank and HDFC coming into effect, do you think that the impact of the merger-related synergies will start coming in from Q2 onwards?
The low hanging fruit pertaining to the merger, in terms of basic customer data translation and first level of mining the same, should be early. However, the synergy opportunities are much larger than that encompassing multiple entities and geographies. This should play out over the long run if management execution remains on point.
What are the stress points for the merged entity in the near term?
Apart from the much discussed stress of SLR/CRR/ PSL on profitability and drop in CASA proportion impacting funding economies, ultimately it’s a marriage of two large behemoths and would need careful commandeering of people issues during and after the integration process. This will be critical to reaping the benefits of synergies spoken about earlier. Cooperation will be key to success.
Both HDFC Bank and ICICI Bank are your top picks in the sector. At present, both are trading at similar P/B multiples. Do you think HDFC Bank will be able to command a valuation premium once again against ICICI?
At a cursory glance, it may appear so. But there is a little more to the story. If we strip out the subsidiary valuation, ICICI is trading at 3.4x 1QFY24E core bank BV while HDFCB is trading at around 20% discount to the same, on an apples to apples basis. Our 12m target price for ICICI is INR1190 (20% upside) and HDFC Bank is INR2260 (34% upside, and our top pick)
We have seen at least three reverse mergers in the sector – HDFC Bank, Ujjivan SFB and IDFC. Why is this becoming a trend? Is there a regulatory angle as well?
The truth is that many names in the Indian stock markets have suffered long from holding company discounts. The only fundamental reasons that drive a holding company discount are capital allocation concerns within the holding company level (i.e. is a cash flow generating business subsidizing a cash guzzler) or differential level of entity ownership by promoters that can create the prospect of spin-offs, mergers etc. at adverse valuations for minority shareholders. However, in the case of many Indian companies (including banks and SFBs), material discounts have applied even when no such worries exist. The NOFHC structures for new bank licenses in 2014 and even for all small finance bank licenses that followed, and subsequent listing requirements, created deep discounts for the holding company in many cases. As the regulator has turned in favour of merging these entities, it is fertile ground for value unlocking through unwind of the discount.