Retail focussed banks & NBFCs are secular 3-10-year stories: Sanjay Parekh, Reliance MF
Talking to ET Now, Sanjay Parekh, Reliance Mutual Fund, says we will see very high accelerated slippages this quarter and maybe FY19 also would get a little lower ROEs and ROAs and higher credit cost. But beyond that, they look quite promising.
Having exposure to the banking sector and looking at the Reliance Banking Fund, what do you as an investment manager feel about the developments in the banking sector?
There are two aspects to it. Clearly governance, ownership and risk management are extremely critical and we have seen that banks which are very strong on all three have benefitted and the rest of them certainly have their concerns.
But we certainly have to see the positive side of it also. We have come a long way on this sector in terms of reforms. The banks have got the government infused capital. We can debate whether it was enough. Then you are seeing the resolution process. All the stakeholders are working in cohesion. There could be some litigation. There could be some speed breakers, but by and large, directionally you ask any of them and people are positive.
The third part is reforms. First, in the steel sector, now in the power sector where the stress is higher. Things cannot change overnight but it would gradually get better. Also, credit growth is looking better and that will certainly help. The yields also have now softened, so the scare of rising yield at times causing pain on the bond portfolio has also receded.
The overall macro is by and large in control, barring that fiscal deficit could get a little higher but if you take balance of payment or inflation, things are by and large under control. All these are actually very strong tailwinds for the banking sector.
You have a choice today, you have private banks with less asset quality issues and there is a huge opportunity there. Then you have these large corporate banks, going through this transition and we have to see what is in the price. There are negatives. The RBI guideline will accelerate the NPA provisioning in Q4 and even in FY19. But all these mean tighter credit standards, better governance ahead and that really augurs well for the banking sector.
Also, what is the discipline of borrowers? The discipline of borrowers is really going to get established. Even the corporate banks, the retail banks are really strong. The corporate banks are going through a transition. We will see Q4 being weak. We will see very high accelerated slippages this quarter and maybe FY19 also would get a little lower ROEs and ROAs and higher credit cost. But beyond that, they look quite promising.
The Reliance Banking Fund has outperformed on all timelines. From 25th May 2003, it has outperformed the index with a return of 24% annualised basis. 26% weightage is with HDFC Bank, Bharat Financial is next, ICICI Bank also has a sizable position. You also have some holding in SBI. Should investors look at ICICI Bank favourably through this leadership transition or is it really wait and watch?
I will guide you through the broad framework we used because we will not get into the specifics. So, the key thought was that one is a set of private banks with less asset quality pain and as the fax sheet suggests you have HDFC Bank or Bharat Finance which will be transiting to IndusInd Bank and then Kotak Bank. All three put together is almost 42%. These are banks which will gain market share. They have strong franchise. The CASA is strong. ROAs and ROEs will be very strong and they will gain market share ahead also. We believe that even if you do not take re-rating upwards, even if we get the earnings growth led appreciation, that is very good. It is about the risk rather than return in these banks. You obviously have to get the risk adjusted return right.
The second piece is corporate banks where we are only into the large corporate banks — be it private or public and the largest. There we are significantly underweight compared to our benchmark and as the fax sheet suggests, we have just two large corporate banks and there too we are underweight.
Our view is that we are going through a transition. The retail piece of both of them is very strong. There are subsidiary values which are very good. All the subsidiaries are doing well. They would have higher credit cost in Q4 and FY19 also would have a higher credit cost but the valuations are really reasonable now. On adjusted book value, they are now at one time on forward basis.
We think that a lot of it is in the price and we will have to see some more pain in earnings ahead but on a longer term, there is value. That is our view on these large corporate banks. Then we have select housing finance, insurance play, NBFCs which by and large are going to do well. We have seen even the bond yields coming off. So, some of these NBFCs which had a problem on a liability side, may actually not be the case.
The IndusInd Bank stock is up 20x over 10 years. But if you bought into Axis Bank or ICICI Bank, you havent really got handsome returns. So, betting on corporate banks even though they were cheap three years ago or were cheap five years ago has not really been a great exercise. Whereas if you bought a retail facing NBFC or retail facing bank, you have pretty much hit a home run in last four-five years. Do you think that trend towards retail dominated franchise will continue?
You are right. One, we are very positive on the retail focussed bank/NBFCs with less asset quality problems. We think there is a secular three-, five- and ten-year story there. We still feel that valuations are reasonable. They are not rich because for the ROAs, ROEs and sustainable growth, you take on price earnings basis. Price to adjusted book basis is reasonable. We are very clear and that is showing up in our weights which is a significant outsized weight.
The second piece is the corporate banks where we are underweight in our banking portfolio. Having said that the retail piece, you cannot break a bank but if you take the retail piece of these banks with CASA of 47-48%, you are actually giving a significant negative value to the corporate piece. We feel that if you take the gross stress right now and let us say the gross stress I am talking of is NPA plus the other stress going around now.
Did you juggle your portfolio when it came to the banking fund? Has HDFC Bank come off after that high weightage that you had of 26.25%? , Have you upped your weightage and ownership in ICICI Bank or an SBI or have you brought it down in the last one month or so?
Without getting into specifics, we had reduced our weight in corporate banks when we got the RBI guideline and we were underweight already.
We have increased our underweight in corporate banks but we believe from here onwards, they have significantly corrected and we really believe that while there could be some more bad news ahead, the recent lows that we have seen are a very attractive level to increase rate. But you need to keep in mind that certainly the Q4 could be painful.
Even the first half of FY19 could be a little painful but we are very confident that these large corporate banks, I am not talking of the small PSU corporate banks but the large corporate banks, would certainly have a better FY20.