Who Will Benefit From Corporate Credit Revival? | NDTV Profit
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00:00We are in conversation, in fact, Harsh is in conversation with Bernstein on their outlook
00:05for the banking sector.
00:06So let's quickly go across and hear about that.
00:10You know, we've spoken about ICICI, you just spoke about them.
00:14Let me try and cover that too.
00:16Just with regard to that being a better bet, given the current circumstances, risk reward
00:23of course less favorable, it seems at least from a relative valuation perspective.
00:28But therefore, is ICICI a better bet?
00:31Yeah, I think ICICI will continue delivering its healthy compounding story.
00:36I think the reward though is limited to that compounding improvement.
00:42The chances of a multiple rating looks less in the case of ICICI.
00:46Now there are two potential scenarios which could drive a higher multiple.
00:52One is an asset quality situation or deterioration across the board.
00:57And ICICI coming out on par with an HDFC or Quota in terms of its asset quality.
01:02That will then demand a premium that HDFC and Quota used to earn in the past.
01:07That is one scenario.
01:09The other scenario is where the bank delivers a higher deposit growth than HDFC.
01:14Now, despite all the concerns around HDFC's loan growth and profitability, their deposit
01:20growth continues to be on par or even superior to ICICI in most of the recent years.
01:26A change in that trend will probably strengthen the case for ICICI's premium to become permanent.
01:32So barring these two scenarios, it's hard to see a big premium set in permanently for
01:39ICICI beyond where it is already trading in today.
01:43Sure.
01:44And you know, let me also go to the other largest consumer lender when Bajaj Finance
01:50is concerned.
01:51Bajaj is probably the other underperformer outside of HDFC in the financials.
01:56What's your sense?
01:57What's happening there?
01:59What's the key concern?
02:01And is there a turnaround possible there with regard to investor returns and fortunes?
02:06See, I think Bajaj is probably a few steps behind HDFC in this whole turnaround story,
02:12if you want to call it that.
02:15I think the concern is more around the durability of growth at the current high ROA numbers.
02:23So I think the lender is at 4.6 to 4.8% ROA.
02:29I think the concern there is, can they continue growing at 25, 27% while maintaining that
02:35profitability?
02:36We think it would be difficult.
02:38And therefore, there has to be a reset of expectations, either in terms of growth or
02:43profitability.
02:44And then once you have a reset, then they could get back to their usual trajectory of,
02:50you know, beating expectations.
02:51Until then, I think it's going to be a bit of a trouble for them.
02:57And I think there are also other overhangs that exist for the stock.
03:01I think there is a management transition, which is around the corner.
03:04There is the listing of its subsidiary BHFL, and also there's been a foray into various
03:10new segments.
03:12And, you know, the lender's initial success factors or success metrics in those new segments
03:19will also remain a bit of an overhang.
03:21So I think all those three are temporary or near-term overhangs.
03:26And the longer term issue would be around what is the sustainable growth and profitability
03:32combination that the lender could deliver.
03:34I think once that new normal is set, then we could get back to that healthy compounding
03:40story that is so delivered in the last decade or so.
03:45Sure.
03:46You've basically ascribed it a valuation of 25 times earnings forward, 24 times earnings.
03:55Give us the rationale behind why a P ratio over a P-B ratio for something like a Bajaj
04:03Finance?
04:04Historically, many of the fast-growing lenders have been valued using price-to-earnings simply
04:12because they come back to the markets for capital so frequently that the book value
04:18and the capital ratio, and therefore the book value, tends to be quite volatile.
04:23So your price-to-book pattern tends to drop immediately following a capital raise and
04:28then build up again, only to drop again when there's a big capital raise.
04:32So in order to avoid that seesaw change in price-to-book multiples, investors have typically
04:39used price-to-earnings.
04:40And Bajaj is one of those stocks which has held up well to the P-G of one thumb rule,
04:49where their long-term earnings growth has been roughly about 35%, and it's also traded
04:55somewhere in that range from a P-E multiple perspective.
04:58So our rationale is that this is a lender that is going to settle in at low-to-mid-twenties
05:04earnings growth, and therefore the P-E multiple would also settle at something similar, and
05:09therefore our rationale for that 24-times price-to-earnings for Bajaj.
05:15With regard to the corporate credit cycle, because we've been talking so much about it
05:22over the last few quarters, really not kicking through, when do you expect that to happen,
05:28and which lenders would you have your eyes out on when it comes to corporate capex?
05:34I think it's been a long wait, I think we had the first glimpses of it last quarter
05:39when the public sector banks showed a reasonably healthy pickup in corporate credit growth.
05:44The likes of SBI, for example, saw mid-teens growth in the corporate segment.
05:49So it does seem to be around the corner, we've had quite a few false starts, so I don't think
05:55it's there in anybody's base case today in terms of the loan growth projections, etc.
06:00But we do expect it to come back and drive the next leg of growth for the segment.
06:05Now, who would benefit?
06:07I would say the private sector banks this time are better positioned to capture the
06:12opportunity, simply because they have better capital ratios, larger equity basis, better
06:19deposit growth even, I think the excess liquidity for the public sector banks are largely consumed.
06:24So the liquidity factor comes down to deposit growth, where the private sector banks are
06:29doing much better than the public sector banks.
06:31And finally, they've also captured a lot of the float and flows, which in our view is
06:37key to underwriting well in this segment.
06:40And therefore, the private sector banks are indeed better positioned.
06:43I think where it becomes a bit of a question mark is their willingness to lend.
06:47So right now, we are seeing the public sector banks are a bit more keen to lend into the
06:51segment versus the private sector banks.
06:53Part of that could just be the memories of the troubled phase that they went through
06:59during the last cycle.
07:01And the other is also the fact that the retail segment continues to grow at a reasonable
07:05pace.
07:06So I think a slower retail credit growth, or at least a reduction in the risk adjusted
07:13yields on the retail side, or reduction, a gap between the retail and corporate side
07:17in terms of the risk adjusted yields would drive the interest for the private sector
07:22banks back towards the corporate segment.
07:25So from a pure ingredients perspective, the private sector banks are better positioned.
07:29Their willingness is lower now, but at the right yields, I do think the private sector
07:36banks will come back into the segment and they will benefit, especially the large two
07:39or three banks will benefit from a revival in the corporate sector, corporate credits.
07:45Right.
07:46And just with regard to loan to deposit, you're seeing private sector banks loan to deposit
07:50ratios far more efficient, closer to the 90 to 100% kind of mark, HDFC at 105, of course,
07:58versus the PSUs.
08:00Do you believe that will not play a role with regard to, you know, taking advantage of the
08:06corporate CAPEX cycle?
08:07So wouldn't it, therefore, advantage PSUs over private banks just trying to get that
08:12perspective?
08:13Right.
08:14See, I think a lot of the lower loan to deposit ratio for the public sector banks is structural,
08:20meaning that they have lesser equity and therefore they need to hold more deposits.
08:24I mean, imagine you have a hundred dollars to fund on the asset side.
08:28If you only have $10 of equity, you need to hold $90 of deposits, whereas the private
08:34sector banks, if they have $20 of equity to fund the same a hundred dollars of assets,
08:39they can do with $80 of deposits.
08:42So a lower loan to deposit ratio, therefore, to a large extent is structural for the public
08:48sector banks.
08:50And it can converge with the private sector banks only when their capital ratios are on
08:55par or is in line with the private sector banks, at which point their ROEs will drop
09:00quite significantly.
09:01Because today the higher ROEs for the public sector banks is largely a result of greater
09:06leverage.
09:07So if they raise more equity, then that ROE will take a knock as well.
09:11So there's no easy excess liquidity available for the public sector banks for them to dip
09:16into, which is also visible when you look at the pricing of term deposits today, because
09:23the public sector banks are actually paying a higher price, almost about 30 to 40 basis
09:28points at an aggregate level for term deposits compared to the private sector banks, which
09:33is an inverse of the trend that you've seen during most of the last decade, where the
09:37public sector banks have generally tended to pay a lower price compared to the private
09:42sector banks when it comes to term deposits.
09:43So there is liquidity pressure through the system.
09:46There is no special advantage or whatever special advantage in terms of excess liquidity
09:51that the public sector banks had has largely been consumed.
09:55So both the segments, both the sets are largely on par today from a liquidity perspective.