With the Reserve Bank of India (RBI) cutting the Cash Reserve Ratio (CRR) by 50 basis points, Ganapathy highlights that the deposit environment is set to improve, potentially leading to a 13% growth in deposits. This, in turn, could support a 13-14% growth in loan disbursals.
According to Ganapathy, such an outcome would represent a favorable result for the industry in the year ahead, indicating a positive trajectory for financial institutions.
Ganapathy noted that the environment for the life insurance sector is quite unsettling, prompting him to take a relatively cautious stance on the industry.
This is the edited excerpt of the interview.
Q: The big boy, HDFC Bank. Will you rejoice that their deposits is better than the market or will you worry that the loan growth is low, but this is quite low, at barely 3 to 4%?
A: Of course, they have indulged in selling down some of the loans and the path here is to get down to 90% kind of an loan-to-deposit ratio (LDR), and then you can start growing a bit more aggressively. Every bank in the system, which has gone through a period of merger or various other issues, of course HDFC Bank doesn’t have an asset quality issue, you have seen them going through a consolidation phase, where they actually declined their loan book for that matter. HDFC Bank can’t do that, but nevertheless, at least grow at a slower pace, and then later on, go on to a path of higher growth and higher profitability.
I think we have to understand that this is a period of consolidation. It will continue for another six to 12 months before you can see the acceleration going forward. What is more important here is the deposit growth. Let us assume they end the year with the same 15-16% kind of a deposit growth, which means you are talking about a good quarter four, ultimately, all things that has to flow into margins. So if they can indeed improve their margins and an overall ROA, the outcome definitely is likely to be positive for the stock over the longer run.
Q: Are you getting a feeling that the margin pressure is over for the banking sector in general, or is there still competition for deposits, and therefore margins will be under pressure?
A: Let me put it this way, that the deposit environment should get slightly better next year. Because if you look at it, the RBI has cut CRR of 50 basis points and if you assume a money multiplier of 5X which is one upon reserve ratio, that’s the way we calculate money multiplier, the number is five times. So, a 50 basis point cut should actually give a 200 basis point improvement in deposit growth next year. So you are looking at more like a 13% kind of a deposit growth, which can support a 13-14% kind of a loan growth. Now this is a good outcome, I would say for next year.
Of course, it would partially be offset by the rate cuts that we are looking at about 50 basis points for next year, and that keeps the margins slightly under check. So I don’t think margins will expand from current levels, more or less it should be maintained around the current levels, is what I would say. Because there is an offsetting factor in terms of a cut in rates, by the Reserve Bank of India.
Q: Kotak Bank, they have not yet given us their pre quarter numbers. That resignation of the CTO, was a bit of a jar, because they already have been pulled up by the Reserve Bank for credit card issuance, and they were stopped last time. Is this a big setback, or is it valuable enough, has it fallen enough and you know the pedigree of the bank. So does it become even better than an outperformer, I think you upgraded it some time back?
A: Let it put it this way, that would the resignation of CTO in any way affect RBI’s decision-making process? The answer is no. So, by the end of last year, I think the audit report might have gone to the Reserve Bank of India, the RBI would be mulling over it, and perhaps, I don’t know, I am just guessing April-May should get some kind of clarity from RBI on the bank. I don’t think the resignation of the CTO in any way affects that particular outcome. Obviously, there is going to be a little bit flux. They will have to find a new CTO.
What is more important for the bank at this point in time is to resume the unsecured lending, the credit card launches all that has been banned by the Reserve Bank of India, unsecure lending through the digital route. So till that time, obviously you are going to go through a period of flux, or other relatively weaker numbers. Once you get the approval from the RBI, that’s the major catalyst for the for the stock, I would say.
Q: The other bank I want to ask is IndusInd Bank it was a nasty jar when they announced their numbers last time. But, they have since sold their MFI loans, a large part of it to an ARC. How did you look at the pre quarter announcements, and your view?
A: The stress is going to be there, MFI stress is only going to further increase over the course of next, I would say, couple of quarters. And unlike most other segments, this segment, of course, gets affected even more when there’s a credit pullback. So you are already going through a period of over leveraging, which is now getting shown into the numbers. On top of that, you are also not likely to lend incremental credit, which can further result in a credit squeeze, and eventually further degree of NPLs. So we are going to go through a period of pain for all MFIs, and IndusInd Bank being the largest in the banking space, would go through that.
The current price adequately in our opinion factors that kind of a stress. Now the problem here is until the time you see earnings recovery, which means you start seeing plateauing of MFI NPLs and then, consequently, reduction in credit cost that at least is couple of quarters away, point number one. The second thing, unfortunately, the way you look at for IndusInd Bank is we need clarity on the CEO tenure. We are very close to that, so March 24 and 23rd is the time when Sumant Kathpalia tenure ends, and we are on January 7. We should get an update from the Reserve Bank of India by the end of this month, or early Feb, in case he needs to get a three-year extension, and that is a very important factor also driving the stock performance in the near term.
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Q: Take your point on MFI, Utkarsh Small Finance Bank, highest decline in collection efficiency in this quarter. 87.7 is a bit of a jar. Now how would you look at the small finance banks itself? Is there any pick for you there?
A: We don’t cover any of them, but having said that the MFI portfolio stress is going to play out. Equitas Small Finance Bank would be having a lower MFI exposure to that extent, less affected compared to others. But even everybody gets affected. Interestingly, I was just speaking to a couple of investors after a very long period of time in the banking sector, we are back to asset quality discussions, so we are not talking about when the unsecured NPLs will peak out. So clearly, you have to differentiate who is going to see more stresses and who is going to see less stress. Of course, the likes of HDFC, ICICI and of course, some of the PSU banks would continue to see lower stress compared to others. Therefore, you stick with them than any of the other smaller finance banks of that matter, NBFCs, who are a little bit more exposed to that.
Q: I was taken aback when I saw the PNB numbers. They were so good, the deposit growth, but other banks that followed were extremely modest, anything in the pack?
A: If you look at PSU as a pack, PNBs this quarter deposit growth obviously has been pretty strong, but you know, that’s also base effect, because previous quarters has not been that great. So if you look at – for example, over the course of last 12 to 18 months, or for that matter 24 months, structurally, they have been losing market share when it comes to deposits, and that is my cause of worry. If your system is growing at 11% you have seen HDFC Bank and ICICI Bank growing at 15% and many of the other private sector banks haven’t done very well, the PSU are the ones which are losing market share.
SBI itself is growing at 10-11% or like they are expected to go at that level. So these smaller ones are losing even more. So that is the cause of worry over the medium term, and I am still waiting for the expected credit loss (ECL) guidelines. I mean, I do believe that we are closer towards the ECL guidelines now than what we were last year, and these guys don’t carry any kind of contingent buffer. I am sure that there is going to be a hit on their net worth across all the PSU banks when the ECL guidelines gets crystallised.
Q: NBFCs, with RBI in a pro-liquidity mode and possibly a couple of cuts, are NBFCs better place than banks. Which ones?
A: I have a bias towards slightly lower valuation NBFCs. The way I look at it is, you have to understand that this is going to be a limited rate cut cycle. So to that extent, the benefits accruing to the NBFCs are also going to be limited, because only looking at a 50 basis point rate cut so it is not that we’re going to see a massive expansion in margins because of a falling rate environment, considering the rate cuts itself is limited.
On top of that, the RBI is continuously monitoring credit towards NBFCs, bank credit towards NBFCs. I don’t think so that’s already gone down to single digits. Maybe there could be a slight pickup, but banks are 50% of the funding market for the NBFCs, and banks will continue to remain cautious. On top of that, one thing which the market is missing, in my view, is that growth this cycle is definitely going to be lower compared to the growth seen in the earlier cycle. Because the kind of growth in unsecured space for the fintech NBFCs, for the normal NBFCs that we saw, is not going to happen in the next couple of years. We are going to look at a slightly lower growth environment because of the unsecured loan growth being relatively weaker. That indeed is the outcome. I would not prefer the high valuation NBFCs. I will go for a lower valuation NBFC, like an Aditya Birla Capital of that matter, Shriram Finance, which fits the bill relatively better.
Q: We don’t have time for insurance, but you have only one buy there, SBI Life?
A: We will have to relook at the entire sector recommendation. The problem with life insurance sector in particular, is the fact that the people thought we are seeing the end of the regulations. That is not the case. We are going to see now more regulations coming on the perhaps the bancassurance, distribution, agents. Now we have only tied agency concept in case of insurance, what happens if they open the entire agency market for everyone? So it’s going to be quite an ugly battle.
I don’t know whether the system is prepared for a massive overall of the distribution ecosystem, a lot of regulations are on the product and on the consumer front. Now the regulations are going to move to the distribution front, and distribution is the bread and butter for the life insurance space. So it’s quite an unsettling environment for the life insurance space, so I would be relatively pretty cautious on them.
