Ambit Capital not buying into private banks anymore; should you exit too?

By: | Updated: March 6, 2017 12:30 PM

Brokerage firm Ambit Capital on Monday said that it would not allocate any further capital to either the private or public sector banks, as concerns over credit growth do not support any more rise in the valuations.

While of the mid-sized private sector banks have shown very strong growth to justify current valuations, it’s hard to say how long that will continue, Ambit Capital’s Equities Head Pramod Gubbi says.

Brokerage firm Ambit Capital on Monday said that it would not allocate any further capital to either the private or public sector banks, as concerns over credit growth do not support any more rise in the valuations.

“Private sector banks have reached valuation levels where it’s difficult to justify,” Pramod Gubbi, Head, Equities, Ambit Capital, said in an interview to CNBC TV18.

Gubbi said while the private lenders have seen growth in the recent past, there is little certainty of it continuing so hereafter.

“They (private banks) have been delivering significant market share gains, as we had expected, despite the system’s credit growth being fairly anemic. Some of the mid-sized private sector banks have shown very strong growth to justify those sort of valuations, but it’s hard to say how long that will continue,” Gubbi said to CNBC TV18.

Gubbi said that the public sector bank’s increasing efforts towards garnering the retail lending market share will likely pose competition to the private sector banks in their area of strength.

“There were areas, particularly retail lending where they were strong and were taking market share. But increasingly we see that even the PSUs banks target this sector, and as a result market share gain at the same pace which we have seen may not come through,” he said, adding, “So we need to temper our expectation of credit growth even for the private sector banks and question valuations, unless we see a completely different investment cycle coming in.”

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As for PSU banks, Gubbi said the government must address the concerns over lenders’ asset quality in order to make them strong enough to support investment and credit growth. “We still believe that the government needs to bite the bullet as far as asset quality is concerned. They need to take those losses upfront, recapitalise those banks, because not only it’s important for those banks to come back, it is also important from an economic perspective because as and when the investment cycle picks up, we need these banks to be in a position to support that,” Gubbi said.

India’s Chief Economic Advisor Arvind Subramanian has proposed creating a ‘bad bank’ that could buy up bad debts from lenders to restructure them, echoing the views of Reserve Bank of India’s newly-appointed Deputy Governor Viral Acharya, in order to taking a new approach to tackle the problem of high NPAs (non performing assets).

The proposed ‘bad bank’ would be a centralised agency that would take over the largest and most difficult stressed loans from public sector banks in order to help clean their balance sheets, and would take politically tough decisions to reduce debt, providing an impetus to further lending to spur economic activity.

It has now become imperative to tackle record stressed loans of $133 billion held by Indian banks by last September, or about 12.34% of their total loans, as the burden constrains lending and delays private investment.

 

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