“Finances in general will have a bit of a muted quarter as RBI tries to push the CD ratios. Many of the private sector banks have CD ratios north of 100%,” says Sridhar Sivaram, Enam Holdings.
There was a correction in March. I can officially say that line. When it hit us, we thought ok, the bull markets are showing signs of getting fragile. The mid and small stocks all thought the party was over, but the correction actually only lasted a few trading sessions. All time high on the Nifty, smallcap index 1% from all time high and I think the midcap index will make it there today.Yeah, so, I think sometimes we need those little corrections because it’s a reality check. When you have a bull market like this, there are always surpluses that are built up especially in the small and medium. So, I think these are very healthy corrections, but having said that you look at the Nifty in the last four months, it has gone up 3-4%.
So, it’s not like it’s really taken off and I’d say that also reflects a bit of caution about the results season that we’re going to see.
I mean the general feeling we get is free consumption has been a bit slow.
Financials in general will have a somewhat muted quarter as RBI tries to push the CD ratios. Many of the private sector banks have CD ratios north of 100%.
The only way you can lower that is by reducing your loan growth. So, we’re going to see some moderation in the profit growth in the fourth quarter and I think that’s what the market is reflecting in terms of some nervousness in terms of the markets that haven’t done much. I would say in the last four months, 4% is where the Nifty is year-to-date.
When we last spoke, I’ll just remind our viewers that you were optimistic. You were bullish on banks. You were bearish on IT. You were optimistic about defense and you thought and your view was that PSUs will remain leaders. Has that view changed?
No, not changed at all. It remains broadly the same.
Long banks, avoid IT, long PSU and you love defense.
Yes, so, I can go on with details, whoever you want me to start with.
You can add more actually. Let’s take banks, because what you said, what you’re seeing on the screen is kind of an underperformance to anticipate relative to earnings, but the stock may be doing another thing.
I think within banks at least within our organization itself we have a difference of opinion between private and PSU. I still love PSU banks as I think the valuations are very supportive.
Who doesn’t agree with you?
That talk is over coffee when we go out. But what’s fair right? I mean different people manage and different people have different views. So, that is my personal opinion that PSU banks will continue to do well.
Having said that private sector banks after some time, they now look ready to move up, maybe not immediately as they still have issues with the CD ratio as we discussed. But I think the base is being established, maybe in another six months. If the liquidity in the system improves, they benefit the most because they have the higher CD ratio. And
So, I think that as a segment looks very good. They have their own challenges, which is why the banks have underperformed. But I think the base is set for them to move up from here. So, as I said PSU banks generally my favorite. But private sector banks are very close.
Why CD ratio, this whole pattern is not valid for PSU banks? Can you break it down for our viewers?
Yes, so, I think why the CD ratio of private sector banks has gone up? I mean that’s what we have to look at because loan growth has been very strong and deposit growth has not gone with that.
So, you then borrow from other than the normal deposits and the unwritten rule is from RBI that around 80-85% is the fair number.
They didn’t give a clear number on that. But we know from talking to banks that 80-85% is a number they are comfortable with.
Private sector banks went to 100%. So, I think there are phone calls that go to banks just to highlight to them that you are crossing the threshold, the Lakshman-rekha and you have to get it down.
While for PSU banks they have not grown their loan book very strongly. Their profit growth mainly came from lower credit cost. I mean they had such high NPAs that if you see in the last three-four years, the credit cost of almost 2% has now for SBI is now down to 0.1.
On average PSU banks are around 75-80 basis point which may still come down. So, every reduction of 10 basis points in credit cost has a disproportionate effect based on the balance on the profit.
So, they had, the last five years CAGR would be around 30-40% profit growth for all PSU banks put together.
In fact, that’s the number I’m giving that if you look at the last three years, the profit growth of PSU banks has outpaced the stock return growth.
So, in fact, they’ve been down, which people don’t realize is that their profit growth has been so strong that the stock prices haven’t followed suit. So, my view is that the rate of profit growth for PSU banks will come down, but they still have room for performance, that’s how I would categorize it.
A better move predicted than the biggest of the lot within the private banks that haven’t moved at all or have barely begun to move?
Yes, I think if I just look at what profit growth PSU banks can give, I think they will do better growth because private banks have some structural problems with CD ratio.
So, if you keep reducing your loan growth, it will show up in your profit growth. I mean, they have a few quarters to adjust the tall CD ratios, but once that’s done, I think they’ll be ready to roar.
Just today we celebrated the 50K marker on the midcap index and that too played catch up and how. What is the view on how investors should approach the broader markets?
I think a broader market is very hard to say. So, you have the good, the bad and the ugly in the wider market. You have pockets where there is irrational exuberance and there are pockets where there is deep value.
I can’t really paint the same brush for the whole wider market. But I would say that the large caps at this stage, they look much better from a valuation perspective, from an earnings growth perspective. But having said that, I would like to share a number that RBI reveals every quarter.
So, they give 2800 companies a profit growth number. They give all the details. This was for the third quarter number that was revealed. So, the 2800 companies excluding PSUs and financials, top line grew by 5%, bottom line grew by 48%.
So, that tells you why midcaps have done well because this is a basket of 2800 company data released by RBI and they release it every quarter. You should track it down. It’s a very interesting number.
It gives you EBITDA growth. It gives you a profitable growth. And it tells you how the broader companies are doing and EBITDA growth is strong. Interest cost is going down. You get a structured view of how companies are doing. So, I would say the broader market has done well because profits have done well.