‘Indian banking system resilient thanks to strong deposit base’

Interview: A Balasubramanian, MD & CEO; Mahesh Patil, CIO; Aditya Birla Sun Life AMC

‘Indian banking system resilient thanks to strong deposit base’

The US financial crisis has had no bearing on Indian lenders and the sell-offs in banking stocks are largely on account of FIIs pulling out. Aditya Birla Sun Life AMC MD and CEO A Balasubramanian, and chief investment officer Mahesh Patil told FE’s Siddhant Mishra that the fundamentals of domestic banks remain strong and the crisis is US-centric. Edited excerpts:

FIIs continue to exit India, having withdrawn close to $2.6 billion this year so far. Do you see any revival?

Patil: We started the year with negative flows because valuations were relatively expensive for India compared to fellow emerging markets (EMs). And China, which had underperformed significantly over the last two years, was opening up. So, we saw some money shifting to the likes of China, Taiwan and South Korea. 

We’re seeing outflows due to sell-offs globally, given issues plaguing banks abroad. Money will return to EMs eventually, and India will also get a share of that thanks to valuations now correcting, though it may happen only in the second half. 

Do SIP redemptions point at rising pessimism towards the markets?

Patil: Redemptions also took place last year as India significantly outperformed, given the discomfort surrounding valuations. Markets have been more or less flat since a year-and-a-half, while debt has emerged as an alternative as returns are fairly attractive from a risk-reward perspective. 

However, overall flows aren’t likely to be hit as those putting money into SIPs are investors for the long term. Redemptions from time to time could lead to net inflow figures changing, buts they won’t cause a dramatic slowdown. 

UBS’ decision to take over Credit Suisse does not seem to have convinced many investors. Are we staring at a larger crisis?

Balasubramanian: There hasn’t been any collapse like Lehman, which had a global presence. While the current crisis has come as a surprise, it has not been of the same magnitude. Second, this has largely been a US-centric crisis. While the Fed will take steps to ensure there is not failure at a systemic level, individual banks will suffer. It is time for them to reassess. 

UBS buying CS could lead to some risk aversion and job losses. The US has a large base of small banks, which makes it prone to such problems. Indian banks are much better positioned, as they are well controlled and everything is marked to market. 

Banking stocks in India are seeing continuous sell-offs. What’s the reason?

Balasubramanian: That’s more on account of selling by FIIs. Since banks and financials have a bigger weight in the index, any withdrawal by FIIs will impact them. This has no link to the US banking crisis. Relatively, performance of Indian banking stocks is better than the US ones.

Indian banks are in the best position, as they are well-capitalised, customer base is expanding, non-performing assets are low and credit growth is strong. 

Patil: Relative valuations come into play here. If valuations of US banks go down, they’ll be cheaper for FIIs to put money in and sell in India. Fundamentally, Indian banks are strong. This is also because of a good deposit base. There, it is more of wholesale funding, which tends to get pulled out faster during problems, thus causing a liquidity crisis. Here, the strong retail presence makes it deposits stickier. 

Will the markets be able to absorb further rate hikes, which they had earlier not factored in? 

Patil: In fact, the focus now is on supporting the system and not tightening too much. Therefore, there are talks of a pause, and possibly rate cuts sooner than expected. Expectations of rate hikes have reduced following the issues with the US banks.

Do you see the 10-year bond yields rising above 7.5%? 

Patil: We expect it to remain in that band, and not go beyond 7.75%. It will remain slightly elevated, as interest rates aren’t likely to reduce anytime soon. So we see it peaking at that level. 

Sectoral/thematic funds showed a surge in inflows during February. Which sectors did well?

Patil: The sectors that we like are banking/financials and consumption, despite the slowdown. We’re also upbeat on IT, notwithstanding the concerns regarding a slowdown in the US. Domestic themes like manufacturing, industrials, capital goods and infra are doing well. We could also see some PSU fund launches going ahead. 

Balasubramanian: Markets have been in a narrow range. Sectors that have not been part of the rally are being captured in the thematic side. Our Multi Asset Allocation Fund invests in all four asset classes — debt, equity, gold and silver, with a 14% exposure to gold. We expect this to be a major beneficiary over the next two years. 

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First published on: 22-03-2023 at 06:20 IST
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