your outlook on the banking sector given the return of asset quality concerns?
In the banking space, two key issues have emerged in the recent past. In an environment where rates are expected to go up, banks position themselves to control the risk. Small-sized banks with lower CASA ratio were not ready for the rates to move up and to that extent may be hurt with any increase in the interest rates. Some of these private sector banks were given a higher value, based on growth and margin expectations. However, that premise is challenged now. Secondly, if the pain in the system continues for long then you may see the asset quality issues affecting even the larger private sector banks.
We believe that over the next two quarters market would want to see how a few dynamics play out for the private sector banks in addition to the asset quality concerns. Banks may turn conservative in lending, so their growth may come down. If one gives a high multiple to a bank, it is based on expectations of a certain rate of growth. Because of the short-term rates going up, if a bank does not efficiently manage its funding, the margins can be impacted. Together, these factors can affect the ‘return on asset’ of the banks, which were near 1.8-1.9 levels for quite some time. Even if this measure reverts towards its mean value of 1.5-1.6, the market would take a serious note of it. The street may require time till January 2014 for fundamental clarity to emerge on the earnings and book value impact even as valuation may start looking attractive.
Do you think the recent bout of GDP downgrades is yet to affect the earnings expectations for FY14?
In a way, earnings growth is not relevant because it may not be coming from a stronger revenue. At this point, I would like to give more importance to top-line growth than margins, because the currency fluctuations may impact the latter. Since the currency outlook is not certain, it may me more prudent to build in lower multiple into the estimates. What is