ICICI Bank share price | HDFC Bank Share Price: Growth Next Big Risk for Banks; only HDFC Bank and ICICI Bank to show growth above 10%: Digant Haria

“Crude can’t stay above $100 for very long and metals can’t stay at those prices either. Whenever they end, there are excellent companies that will be available at good prices. We hope that some of the big companies will be available at good prices and we will buy them just because the Indian national economy has a very good track once all these macro headwinds subside,” said Digant Haria, Copartner, GreenEdge Heritage.

How do you navigate the volatility and uncertainty we are witnessing thanks to geopolitical tensions? The crude price is at $116! What advice do you give to clients? Is it time to take money off the table?
Over the past two years, all export oriented sectors in India have done very well – commodities, IT, chemicals and pharmaceuticals because the world is doing well. India wasn’t doing so well domestically and now with everything going on in the world it’s becoming clear that India-focused companies could probably be a bit better off as they won’t be hit by global developments. But with soaring oil and metal prices – India being a big consumer of all these raw materials – this can never be good for India.

Like most of our colleagues, we are also watching the market and seeing where this uncertainty ends. Crude cannot stay above $100 for very long and metals cannot stay at these prices either. Whenever they end, there are excellent companies that will be available at good prices. In the past two years, we haven’t seen many fixes. We hope that some of the big companies will be available at good prices and we will buy them simply because the Indian domestic economy has a very good track once all these macro headwinds die down.

At the start of the year, it looked like this would be the year for bank stocks that had underperformed. But it’s early March and things seem to be changing, but again, this game seems to be for the defensive. A rotation is underway towards IT, pharmacy, etc. The banking industry seems to have pressed a pause button right now.
One thing is absolutely clear to everyone: over the past decade, most of the banking industry has been embroiled in the NPA or asset quality crisis. But it is now becoming very clear that we are past that stage. Reforms like IBC, GST, dealing with the IL&FS crisis and Covid – we’ve had several cleaning cycles that have happened in the banking sector and so the balance sheets are really clean and that’s well recognized by the market.

We have seen a very big rally in November 2020 and banks like ICICI, SBI and Canara Bank have reached new heights as it becomes clear that asset quality is no longer a big issue in Indian banking. Thus, the first round of re-evaluation took place.

But when foreigners as well as Indians invest in an Indian business or industry, we are looking for growth. If a company or a sector is only growing at 7-8%, that sector cannot revalue itself because India is a growing market and in the case of banks, the growth is really sluggish. System credit growth is a mere 5% to 6% over the past 18 months.

SBI struggles to give more than 10% credit growth. Federal Bank struggles to do this although HDFC Bank and ICICI Bank generate this higher growth, but these are only three of these banks that give you double digit growth. My conviction is that in an environment like this where growth will not exceed 10%, it is very difficult for the banking sector to reassess itself.

The risk in the banking sector is extremely low because the quality of assets is not an issue. I would go so far as to say that over the next decade, growth will be the next big risk for banks. The last decade was always about asset quality. We give good valuations to HDFC and Kotak Bank because they were one of the few banks that could maintain good asset quality, but now, in the next 5 to 10 years, the challenge will be who can also grow and that is why the banking sector is underperforming.

There are three different reasons why growth in the banking sector is very weak and why it will not be very easy for this growth to resume in the next 6 to 12 months. The first and main reason is right before our eyes. During the Covid-induced shutdowns, only one or two well-off one-crore families didn’t lose our jobs and likely got pay rises and profited from the stock market boom. These one to two crore families are doing extremely well and their consumption is good.

But for the five to six million families of people who worked in shopping malls, in restaurants, in the aviation sector, in the taxi service sector, all that has not yet returned. Their incomes have been wiped out. We can see that reflected in the volume growth we see for a Hindustan lever or a hero or a Maruti or entry level products.

The banking sector is very large. This part of India which is not doing well is also reflected in the banking sector because the next five to seven million families are not borrowing, SMEs are suffering and they are not borrowing much. The only lever for growth right now is affluent retail, people who want bigger homes, or someone who wants a personal loan. The market has become tight and growth will remain a challenge. so that’s my number one reason.

What do you think happened in the NBFC space? Most NBFCs have also cleaned up, raised funds, and reduced the cost of funding. But the markets are still not rewarding them as they did in 2017-2018?
Yes. NBFC balance sheets are also very clean but most NBFCs like Can Fin Homes, Muthoot Finance, Shriram are all trading at 10-12 12 times earnings. Over the past decade, they could easily get 15-20 times. The reason is that when the growth of the system is very limited, it is banks like HDFC Bank and ICICI Bank that have the lowest deposit cost and they eat away at the business of these NBFCs and even the lower rated banks.

City Union Bank was seen as a niche and unique bank, but today HDFC Bank is penetrating straight into the heart of Tamil Nadu and abducting customers by offering lower rates. So the cake does not increase and everyone wants to eat it. So, HDFC Bank, ICICI Bank, Axis Bank and SBI are attacking this space and there is very little left for NBFCs.

Look at Shriram Transport. It has a fantastic balance sheet, fantastic borrowing costs, best numbers in seven years, but the growth rate is 7-8%. Indian markets are only 7-8% excited. The reason is the same as there is no growth in the system and this is probably the main reason for this underperformance.

Second, the startup ecosystem, the slowly and steadily eating away InvIT ecosystem. I wouldn’t consider it a lot of competition right now, but when growth is low, they even take the small leaks that go to start-ups, REITs, and InvITs.

Over the past decade, we’ve punished anyone who grew up really fast and took a lot of risks. So the CFOs of any company will think 10 times before going into debt and that’s why we find that most capital spending happens without going into heavy debt. This is a psychological shock that we have seen happen with public sector banks. When the CVC and CBI surveys came to public sector bankers, they did not lend for five to six years. They still don’t lend very much. So it’s a combination of those three things.

ET Now: The latest news is about the postponement of LIC’s IPO. What is your perspective on valuation and what it means for the insurance industry as a whole? Any choices here?

Digant Haria: LIC’s IPO was highly anticipated. This would attract a lot of new equity investors and probably improve the governance of Indian institutions. But LIC’s postponement shouldn’t come as a big surprise because when the markets are in such a volatile phase and outsiders are selling stocks like HDFC Bank without regard to price, it’s only natural that LIC won’t get the kind of response that he deserves. .

So the government may be right to postpone the IPO. If the stock is not doing well, it will create a negative feedback loop and so it is better for the government to wait for better market conditions as well and things may improve for LIC if they do next year. It’s more about the technique and the list part. But when it comes to fundamentals, LIC should be valued between one and two times intrinsic value because of what we’ve discussed in the past, which is that LIC is the strongest player in traditional products, but that is not present in new age insurance products. It’s the new age insurance products that are creating the big bucks of profits.

So LIC has a lot of hard work. In just six months it can’t do all that, but over the next two, three, four years, if it is able to launch new products, the private sector will have to face competition. But we have always seen that the private sector innovates more than the public sector. I don’t see a very big reason for private sector insurance companies to lose market share. Their market share gains will continue, but it may be a year or two of this uncertain phase where people will allocate some of HDFC Life’s revenue to an LIC because the LIC is too big to ignore and because that the LIC is cheap.

But beyond this year of adjustments, private insurance companies will also compose. They also haven’t gone anywhere in the past two or three years, mainly due to lack of demand and Covid pressures on their payments. So yes, the industry as a whole will remain slightly uncertain until LIC’s IPO is complete, but once LIC’s IPO is complete, we will know where LIC is headed in its business and other private commercial insurance companies.


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