He says that rising interest rates are not a negative factor for banks in the long run. He adds that ICICI bank looks highly attractive, while Syndicate Bank and PNB look good.
He further adds that banks with a high Current Account/Saving Account ratio would see margin expansion. He feels that Syndicate Bank, with 70 per cent portfolio in HTM will benefit.
Excerpts from CNBC-TV18's exclusive interview with Vishal Goyal:
Are you circumspect on banking stocks now, in the light of the fact that their rates are going up? Do you think that it might not scar their bottomline too much?
I think that it is also bank specific. For banks with high Current Account /Saving Account, CA/SA ratio, they would see margin expansion. To an extent, it will offset the losses on the investment book. So it is very bank specific at the current point of time, otherwise interest rate increase is not that harmful for the bottom line of banks.
For example, one which is cushioned on the investment book like Syndicate Bank has got 70 per cent in Held to Maturity (HTM), plus it has got enough cushion on the government securities, G-secs. So they would not see the losses on the Mark To Market (MTM) or investment book, but they could still see the expansion on the margin side.
From the frontlines, aside from Syndicate Bank, what would you recommend to pick up?
I think that the valuations are very attractive for a few banks like ICICI Bank. It is unduly depressed in terms of stock price because we are looking at the near-term, they might face some margin compression because of the high cost of borrowings. The kind of play it offers in terms of life insurance and the kind of investment it has and the value of the investment, 30 per cent of the market cap has been explained by the value of its subsidiaries and investments.
So you are only buying 70 per cent of the bank and if you just net it off from the market cap, you would see it available at 1.2 times roughly on FY07 numbers. It is looking highly attractive at this point in time.
On the PSU side, Syndicate Bank is the best play because it has a mix of NIM, Net Interest Margin, expansion plus lower MTM losses. Otherwise PNB looks very attractive though you are concerned on the MTM side, I think that is what is causing the stock price to be depressed.
Do bank stocks generally perform in rising rate scenarios? What has been the past example because sometimes sectors tends to move in a herd when certain things are happening, like commodity stocks do not perform when commodities are not doing well? Do bank stocks underperform in a rising rate scenario?
It had been the case when you had 40 per cent of Statutory Liquidity Ratio (SLR), and the CA/SA ratios for the banks are now higher than their SLR portfolio, so they are still making net margin on the investment book also. So I do not think that they should underperform atleast when the indices are rising and when the economic fundamentals are strong.
Generally, increasing interest rates hamper the economic fundamentals in the form of low corporate earnings, or if it has a bad effect on GDP growth, I do not see anything of that happening right now. So on the NPA, Non-Performing Assets, side, it is really not a concern, otherwise there would have been a concern because of interesting interest rates, if the projects were getting unviable.
I do not see all that happening right now. It is more on the bond book and NIM tackle expansions right now. That is the net effect, which I could see.
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