Most banks attractive now, but wait for turnaround: JRG Sec

Concerns over slowing economy and increasing non-performing assets have investors spooked. The Bank Nifty is one of the indices that have been swinging from end to end on short-covering moves. Majority stocks in the sector are now available at cheap prices, but have they bottomed yet? Is there value at all in this market?

Anand Tandon, chief executive officer at JRG Securities tells CNBC-TV18 that he does see value emerging out of the financial space in India. Many of the public sector banks and some of the large private sector ones as well have now started to trade at one-year book, he points out.

Below is the edited transcript of the interview. Also watch the accompanying video.

Q: Do you see any value emerging in the financial space either public or private?

A: Value is certainly emerging because many of the public sector banks and some of the large private sector ones as well have now started to trade at one-year book. So from a pure valuation perspective, there is certainly some value thats beginning to emerge. Its now a question of trying to time the bottom and thats a tough call always. So rather than catching a falling knife, you should wait for the turnaround to happen. But it is evident that at 1-1.5 time one-year forward earnings, many of the banks are reasonably attractive as far as valuations go.

Q: Whats your stance on SBI and ICICI ?

A: Like I mentioned, the one thing that I am very wary of is that when it comes to lending, any bank which shows aggressive growth is something that I would be suspect to. Its very easy to lend money but very difficult to get it back. This is a simple caveat which I think many analysts and the investors tend to forget. I am not particularly fond of banks which grow really fast. I think you are seeing that, for example, in SBI where because of the rapid growth in asset that we saw in the slump years of 2008, the NPAs are now coming home true, so obviously, there is a couple of years of lag. But thats the way in terms of banking.

As I mentioned, anything which grows at a steady 20-25% rate, something which has been doing that for the last 5-10 years, that is the place to be. It doesnt matter what happens to the rest of the world because a bank can organically grow 20-25% if it is well managed without taking undue risk. Little more than that, you have trouble and little less than that, you are probably not going to get any major market returns.

So the market however obviously also has to keep in mind that the banks which are larger have a greater ability to raise capital. So no matter how stretched the balance sheet, their ability to survive is a lot better than the smaller banks which is perhaps less stretched but is not in a position to raise money.

Coming back to your question of SBI, frankly SBI is equivalent to sovereign risk in this country. The one area of discomfort is that over the last couple of days, the credit default swaps of SBI in the international market have gone up by almost 40 basis points. This tells you that the risk is still being perceived as going up, not coming down. So I would still say that SBI may continue to remain weak.

ICICI Bank has done a little better in terms of turning around its operations. Unfortunately, it is again beginning to try and grow, which is a problem in todays market. Prudent strategy would be to let it just be there and grow into industry or perhaps slower till the storm blows away. Then obviously, with the kind of market share that ICICI has, it can easily ramp it up.

So between the two, while valuations are almost at par for both of them, I would think the downside perhaps is a little more in SBI in near-term, only because of the fact that its a proxy to India. ICICI has been little bit less in the limelight for the last few months, and therefore to that extent, maybe a little better performer. But really, when you are looking at near-term, we have to look at what the charts tell you.

Q: Axis Bank has been falling so severely over the past few weeks. Whats your call?

A: Axis has been one of the fastest growing banks and though the general feedback is that the asset quality is reasonable, I find it difficult to believe that with the size of the ark, their portfolio can be any different from the rest of the economy. They would obviously have larger exposures to those sectors that banking sector as a whole lends more money to. Therefore they assume that all the high-risk sectors that you mentioned because thats been what has been growing over the last three-four years. So if you have got a bank which has grown aggressively its loan book over the last three or four years at a time when most of the money was going in some kind of long term infrastructure spend, obviously the bank also will have a larger weightage of portfolio there. Given the fact that right now we are looking to move away from those assets which are heavily leveraged, the hit will be proportionately higher.

So I am not sure that the market is doing something which is wrong. I think the market has kind of got it right in terms of punishing those stocks where the growth exposure has been the highest to these kinds of sectors because I think these sectors will remain somewhat stretched and they will require restructuring which means that the future earnings would be somewhat capped for a bank which has been aggressively growing in these sectors.

Q: You spoke about SBI remaining weak. Which are the other stocks that you track in the banking sector that would continue to remain weak?

A: I dont think I can give you names because to a large extent, the portfolios of banks, you need to check with the analysts which one has the highest possibility of haircuts. But there are many of the private sector companies which have grown fast and have also got leveraged. They have exposure beyond whats on the balance sheet in the form of non-funded and derivative kind of exposure. Though the numbers will show that they are not perhaps more risky, the fact of the matter I believe is they are a lot more risky than any kind of spreadsheet calculation will tend to show.

So broadly, I would argue that fast growing banks in the last two or three years are avoid. Those banks which have been very smart in terms of having off balance sheet exposure will be the ones which are likely to be more hit. Especially if they are not that large, with systemic risk, I think capital erasing itself may prove to be a bit of a challenge. So you may want to stay away from some of those.

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