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Budget impact: See more flows into pvt banks; like SBI, says UBS

In Budget 2015, finance minister Arun Jaitley announced several reforms for the banking sector. Key among them was he removed the distinction between FDI and FPI, which gives more headroom to FIIs to invest further.

Vishal Goyal of UBS says this will lead to greater free flow in private sector banks. He sees exuberance in private sector banks, but asset quality remains a concern. He says  Axis Bank has the highest FII premium currently.

Proposed priority sector lending guidelines positive for SKS Microfinance . He likes  SBI and Bank of Baroda .

Below is the verbatim transcript of Vishal Goyal’s interview with CNBC-TV18’s Anuj Singhal and Ekta Batra.

Anuj: The key of course was this Foreign Institutional Investor (FII), Foreign Direct Investment (FDI) cap being composite and that had its impact on various stocks, but how are you reading the Budget and the kind of reaction that we have seen especially in private sector banks?

A: The technical part which obviously was there, FDI, FII sub limits. Since they are removed it leads to a greater free flow for all private sector banks and we have seen historically private sector banks kind of are at full limits on the FII side. So it is some kind of exuberance there that FIIs will be able to buy more of those names plus also there is obvious expectation that MSCI may add all these three names on the basis of higher free float.

Ekta: Can you explain to us which would be private banks that would benefit the most because of the fungibility?

A: All of them benefit. If you look at the FII premium currently IndusInd Bank has got the highest FII premium which is like if basically a foreigner tries to buy it in the FII window they would be paying maybe around 4-5 percent over and above the local price.

Ekta: What was your sense in terms of the Priority Sector Lending (PSL) norms that were announced by the RBI committee last evening and how would it impact something like, say, an SKS Microfinance ?

A: They will be obviously benefiting. There is also a structure around Micro Units Development Refinance Agency (MUDRA) Bank which essentially will be a sub regulator for micro finance more or less like National Housing Bank (NHB). So it gives a lot of legitimacy to this particular part of business. There will be a lot of focus on this particular industry.

So overall it is healthy for SKS. Also they will have finally a backstop on refinancing that they can always go back to the MUDRA Bank for any kind of refinancing need; again very similar to NHB, like NHB refinance for housing finance companies. So it is a good positive development for SKS.

Anuj: Public Sector Undertaking (PSU) banks are now trading at what look like attractive valuations but asset quality is still an issue for some of them. How would you approach these stocks now that no major big bang announcements came in the Budget but some of them are now getting the MDs and CEOs which was something that was lacking, the big ones at least?

A: I approach PSU banks is two ways. One, if you are looking for trading then yes, there is some pain left at least in terms of asset quality. It will take at least two quarters for them to start showing any improvement in asset quality because underlying growth is still kind of weak. Its recovery is anyway low but if one can take a two year plus kind of view then it will be very interesting because you are seeing multiple factors which could rerate these banks. One of course would be recovery in economy leading to asset quality improvement. Second, a declining rate cycle that again is beneficial for the overall economy and also for PSU banks sentimentally.

Then also this particular cycle compared to even 2004-05 cycle and even 2009-10 cycle this is the only cycle where you actually have optionality of structural reforms which has just begun. For example what government is trying to do, even in the Budget they announced formation of a bank board bureau plus also inviting application from private sector for the post of CEOs and eventually it maybe creating a holding company structure and these are all very positive steps in the direction of structural reforms. So, one should take a serious look especially from a two year investment horizon rather than buying for three or six months.

Ekta: Tell us what your top picks are from a two year perspective would be from the PSU banking space and what would be on your buying list at this point even from the private banks?

A: We like  State Bank of India (SBI) and  Bank of Baroda (BoB) among state-owned banks. We cover only three names. Also on the private side we continue to like HDFC Bank ,  Axis Bank and among NBFCs we like LIC Housing Finance .

Disclosure: I don’t own any of these stocks.

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