Rohit Seksaria, Fund Manager, Sundaram AMC, says both PSU and private banks are looking quite good in terms of valuations right now. PSUs have a slight edge compared to private banks, right now. This cycle is a little different. PSUs used to trade at a significant discount because of poor underwriting and they used to consistently face asset quality pressures. Most of them have learned from their past mistakes and we are not seeing any new asset quality cycle right now. In such a scenario, where a PSU bank trades at roughly around one times price to book, in line with history, there can be a scope for a further re-rating here.How are you looking at what the upcoming rate cycle could mean for the banking sector as a whole?
Rohit Seksaria: Rates have peaked out and rate cuts are just a matter of time. Whether it is immediately as of October, December, or in Q4, we should be having some rate cuts following the Fed rate cuts. In such a cycle, fixed-rate lenders like NBFCs and small finance banks tend to do better as their lending rates are fixed and so when their borrowing rates go down, and so their net interest margins expand. That is why we are positive on NBFCs and small finance banks, followed by PSU banks. These have a higher share of MCLR-linked loans and will be able to protect their net interest margins better, while the larger private banks have a higher share of repo-linked loans, which will face an immediate hit when the repo rates are cut.Which are better placed, private banks or the PSUs?
Rohit Seksaria: Both are looking quite good in terms of valuations right now. I would say PSUs have a slight edge compared to private banks, right now. This cycle is a little different. We have to understand that PSUs used to trade at a significant discount because of poor underwriting and they used to consistently face asset quality pressures. Now, most of them have learned from their past mistakes and we are not seeing any new start of any new asset quality cycle right now.
In such a scenario, where a PSU bank trades at roughly around one times price to book, in line with history, there can be a scope for a further re-rating here. Private banks are also cheap compared to their history, and there is enough scope to make money in private banks.
What is your take? How can the EPS estimates be impacted? Have the valuations already factored in that there could be a drive down on EPS estimates for some of these banks in this kind of scenario?
Rohit Seksaria: The valuations have factored in and the EPS estimates have baked in the rate cuts and their impacts on the bank. I do not think that on the consensus expectations, there will be a driving down on our EPS cut there. On the contrary, the rate cuts can improve sentiments for the entire sector as the sector has underperformed last year on the back of net interest margins coming off.
As net interest margins stabilise, the rate cuts can provide the growth sentiments and that can help this sector perform better going forward.
