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00:00Shantanu Chakraborty, India Analyst, BFSI, BNP, Paribas joins in.
00:04Well, SBI and maybe to an extent PNB is just the peg,
00:08but let's just try and figure out what he thinks about what's happening in that space.
00:11Shantanu, great having you. Thanks for taking the time out.
00:13This is Neeraj here. Good morning.
00:15And I'll start off with the most obvious question, which is what did you make of SBI numbers?
00:21I don't know if you have coverage on PNB, but those numbers also came out yesterday.
00:25So, PSU banks at large, are they holding out well or is there an issue out there?
00:31Thanks for having me, Neeraj. So, I mean, yes, the SBI numbers had a one-off.
00:36I mean, and both at the other income level as well as a slightly lower number on operating costs,
00:42which has flattered the overall numbers a little bit. But forget all that.
00:46I mean, just keep in mind that even at NII level, there was a small beat.
00:51So, one very interesting thing which has come through for quite a few PSU banks
00:55and for a few large private banks as well this quarter is that, Neeraj,
00:59the cost of funds seem to have kind of either peaked or peaking in a quarter for a lot of banks.
01:05So, which means that, say, for example, we saw in the case of Axis,
01:10we also saw in the case of SBI that there was sequentially a small but an increase in margins,
01:17which has been one of the key worries going forward since the credit cycle
01:21and everything else seems to be in control for now.
01:24So, overall, I would still say these are strong numbers for SBI.
01:28I mean, the headlines which came out during the day might have flattered those numbers a little bit more
01:34than what they were once you went into the internals.
01:37But nevertheless, the internals remain quite impressive.
01:40And it's not as if stock has still run away to some absurd valuations.
01:44So, we see no worries out there.
01:46SBI overall, you know, in our picks, remains the fourth-placed after HDFC, ICICI, and Axis.
01:55And overall, for the PSU space, all I'll say, Neeraj, is that, yes, you're right,
02:00we don't have coverage on PNB.
02:02But one thing that investors would do well to keep in mind is to look at the relative valuations
02:07within the space.
02:09It would have to be a very, you know, courageous person who would argue that there's another PSU bank
02:15out there with a stronger business model than SBI.
02:19And yet, when I look at valuations, SBI on my own numbers, and let's say what the consensus numbers are
02:27for the rest of the PSU banks, the valuation differences have really come close together.
02:32This is especially true once you build in the subsidiary valuation of SBI.
02:37So, you know, there's a clear message in those relative valuation numbers for investors at large.
02:43The question, therefore, would be that, OK, some people are arguing that some of the PSU banks,
02:49and we know PSU banks have done very well since the COVID lows, right?
02:52The question is, aside of the top-tier private banks, if people are invested in the second-tier
02:58private banks, are some PSU banks, or maybe just SBI, a better bet for people who don't have
03:05PSU banking exposure, should they move out of the second-tier private banks and log into a PSU bank
03:11like SBI and others, or only SBI, or no, not really, not do that trade?
03:16Right. So, I mean, one of our concerns with the overall mid-sized private bank,
03:22most small finance bank cases, and the only exception we have really had to this has been AU Bank,
03:29has been one of slight concerns on the business model.
03:33So, one thing that seems to be playing out very clearly is that the business models of a lot of small banks
03:40like CUBK, which we cover, seems to be under pressure on both the asset side and the liability side.
03:46The cases where the liability was the primary mode, it seems to be shallowing out over time.
03:52And the asset differentiation of the banks, for example, CUBK itself, doesn't seem to be as strong
03:59as that of an NBFC, that it could defend itself through a lower-cost player's attack.
04:04So, you see a lot of migration of customers from these mid-sized kind of banks towards the larger private banks,
04:14and in some cases, even to larger PSUs. So, I mean, the business model in itself,
04:19the profit model is between a rock and a hard place, in my opinion.
04:23So, while large private banks are our primary play, and that's where we think the compounding story is the strongest,
04:31and it comes to you today at a valuation which is below median, with fundamentals which are probably the best in two decades.
04:39There's also, you know, for an investor who's looking for a little bit more beta,
04:47they could look at either, you know, the PSU names, including SBI, which is fourth in our picking order, so fairly high.
04:57And, you know, the compounding stories could be added either through larger private banks or through, say, some insurance names.
05:05For example, we really like SBI Life.
05:09We think that that Barbell approach is a little better than trying to find beta in some of the mid-cap banking names.
05:17Shantanu, we take your point where you said you would rather play the sector through private sector banks.
05:23A few months ago, you were very clear that your pick or your preferred bet here was ICICI Bank or HDFC Bank.
05:30Of course, post what you've seen on the earnings as well, the reaction on ICICI Bank has been much better again.
05:36If I were to ask you right now, and I think I feel like now could be a good time to accumulate those banks, post the earnings,
05:43a little bit of selling that's happened as well, would ICICI Bank still be your top pick or have you changed your bias?
05:50Right. So just to clarify something out there, it's not that we had ICICI Bank as the top pick.
05:57I wish I had because, you know, in hindsight, it would appear smarter sitting in front of you today.
06:03But HDFC Bank was our top pick. What we had said about ICICI, which was our second pick,
06:08is that the compounding that you have available on ICICI is in some sense the most drama free as far as the Indian banking sector is concerned.
06:17It has taken that world positioning that HDFC used to have, a very predictable and quite rewarding compounding.
06:25Right. So, you know, that's how we see ICICI positioned. And on ICICI, one thing we have to make very clear,
06:31ICICI has the second lowest, you know, cost of funds within the industry, surpassed only by Kotak.
06:39And once you load operating costs onto the cost of funds,
06:43you basically realize that ICICI is working with the cheapest raw material in the sector.
06:48So, you know, the luxury of working with cheapest raw material in large size banking,
06:54when you have distribution scale, means that you don't have to find ways to make money.
07:01Competitors have to find ways to catch up with you.
07:04And that luxury of having to do less is invaluable in a business where you actually put out money and tend to make money off the last few EMIs.
07:14The strength of this, maintaining this hygiene over a longer period of time, it cannot be overstated.
07:21So, from that point of view, I think ICICI is very well positioned.
07:25Why do we have HDFC still ahead of ICICI?
07:29Simple reason, that once we acknowledge that HDFC is now a higher cost of fund bank,
07:35we also must acknowledge that it is now a lower cost to asset bank than it used to be.
07:41ROEs have near bottomed out and we see a clear path to 17% ROE, which was their ROE previous to their merger.
07:49So, if the valuations get to anywhere near where they were, you know, we have a large outsized re-rating opportunity also waiting out there.
07:58The re-rating opportunity in something like ICICI cannot be as dramatic by definition,
08:03since given the predictable earnings that they have been delivering and the crowd favorite it's tending to become.
08:09But the path on that HDFC return has proved to be a little more rocky, right?
08:15There are surprises along the way. People are tracking what's happening to liabilities on almost a monthly basis.
08:22And there will be ups and downs, surely, on both positive and negative surprises.
08:27We just think that the cumulative re-rating opportunity is larger and we are happy to, you know, grin and bear the pain along the way.
08:34Shantanu, I'm going to do a Hail Mary here and see if you actually track the space.
08:39And I want to talk about non-banking, right? And I want to talk about everything that's capital market.
08:44And it seems like all the valuation, the alpha play really is coming from the private banking wealth creation segment
08:50that every bank and non-banking player is now going after.
08:53Have you been tracking that closely? I mean, the likes of an IFL, 360, Newama, Edelweiss, you know, Anand Rathi.
09:02Is this a space you track? Are you constructive if you track them? What is your reading of the situation?
09:10So, you know, without getting into stock specific details, I mean, I am yet to come across a lot of people in India
09:19who are negative on the prospects of the Indian capital markets over the longer term.
09:23So that they are riding a structural tailwind, all companies within the sector is very clear.
09:29So, you know, there are aspects, two aspects to this.
09:33Therefore, on all capital market derived plays, you have to figure out what are the valuations they are trading on.
09:39And given what their profit model is related to the capital markets,
09:44are there any risks to it from either a regulatory or a competition perspective?
09:49For example, we have seen large swings for AMCs in terms of how much money they can make on their AUM,
09:55on their equity AUM, purely based on how the distribution architecture has changed given regulatory interventions over time.
10:02So those things also have to be factored in.
10:05And, you know, there should be a certain margin of safety in valuations in factoring in how those numbers work.
10:12The more derivative businesses like wealth, et cetera,
10:16I think it would pay for investors to pay a little more attention to how much of the money made is actually from capital markets
10:23and are there other elements within those respective businesses where, you know, which are also significant sources of profits.
10:32And if there are so, then those businesses need their individual separate risk assessment and valuation.
10:40Shantanu, hi. Tamanna here.
10:43Hi, Tamanna.
10:44I'm just wondering how big a risk is regulatory action right now in this space?
10:51Because that seems to be, you know, giving sleepless nights to everyone who's a banker, an NDFC head and anyone who tracks the space as well.
11:01What do you make of this and does this make you a little jittery?
11:05How do you then classify which companies or which banks are relatively safer?
11:13Right. So, I mean, RBI has very clearly laid down the law.
11:18It's made it very clear that as far as regulations on customer onboarding, basic KYC, AML risks, et cetera, are concerned,
11:26there are zero holy cows irrespective of how prominent the institution may be
11:31and how celebrated it may be within the broader financial ecosystem.
11:36You know, there is, of course, any large intervention from the regulator always carries within it some risk of disruption.
11:45But long term, I don't see this as a negative.
11:48I think India has gone through an absolute transformation, especially accelerated at the point of COVID, in terms of digital onboarding.
11:57If regulatory intent forces people to catch up in terms of due diligence, you know,
12:04and onboarding P&Qs for new business going forward,
12:10then it makes the entire digital architecture build up over the next decade or more, you know, that much more robust.
12:17So, yes, the news flow does not help, especially if you're owner of the stock.
12:22But I think long term, it's going to be, you know, a positive for the sector.
12:28Also, we have to differentiate between the natures of news flow which have come in.
12:35You know, the unfortunate reality is, in some sense, if you are a player who has interconnections within the system in terms of reciprocal liabilities, etc.,
12:46with the rest of the banking system, I think that acts as a natural hedge against the, you know,
12:53against regulatory intervention to the point of destabilization.
12:59So you'll see that those with larger balance sheets have got penalized, but their penalties mostly relate to their respective P&Ls,
13:08while we have other cases where the impact went beyond the P&L and challenged the balance sheet and business model,
13:16which is a very different kettle of fish.
13:18So if I were to, you know, ask you about all of some of the recent players which have been hauled up one way or the other,
13:27HDFC, Kotak Mahindra Bank, Bank of Baroda has just, you know, seen a reversal of its restrictions or a 197 and ILFS.
13:38Which ones do you think will bounce back and which ones will have a bit of trouble?
13:43Right. So, I mean, HDFC, for example, we saw, you know, the embargo go away.
13:50We just saw Bajaj Finance, the embargo on the two products being resigned.
13:55So, you know, even when this Kotak implication came through, we pretty much downgraded it overnight.
14:03I mean, it's not that we are neutral.
14:05Before that, we had our concerns about low compounding and still, you know, lingering high valuations.
14:11So we were neutral, you know, especially given the upsides I had for some of the larger private banks.
14:18I downgraded purely on the concern of rising risk premiums in the minds of investors,
14:24not because there was a large compounding impact.
14:27So one thing we have to keep in mind is that while digital onboarding forms a fairly large proportion
14:33of the new customers that you bring onto the fold, given the demographics,
14:38the age demographics of customers you are bringing in through a digital-only channel
14:43and the current mix of customers, these new customers today are not bringing in a large part of your liability or asset business.
14:53They are larger in numbers than in terms of weight.
14:56So the ticket sizes are smaller.
14:58So when you look at the compounding impact of a 6-, 9-, 12-month interest rate number,
15:03you basically realize that it's not as if, you know, the earnings shifts by a very material amount.
15:10It is more the perception around the, you know, systems and processes of the banks
15:15and how investors look at those and what comfort they derive from business like banking, you know,
15:22where these processes are absolutely existentially crucial for stability is where the, you know,
15:28the perception battle lies, not compounding, not in earnings.
15:32Fair enough. Fair enough.
15:34I mean, I don't know, perhaps there's also a bit of question about how did, you know,
15:39the managements of these very storied and reputed banks allow things to get to this level.
15:45But nevertheless, always great speaking with you, Shantanu.
15:48Thank you so much for joining us today.
15:50Thank you.