“Last year’s Q1 results were affected by MTM losses and slower disbursement velocity compared to the current quarter. With stable margins and mid-teens growth, we anticipate a robust quarter from SBI,” Chakrabarti said. BNP Paribas has set a target price of Rs 780 for the PSU bank stock.
In an interview with ETMarkets, Chakrabarti also discussed the prospects for banks in Q1, valuations, and the implications of the HDFC-HDFC Bank mega merger. Here are the key excerpts:
Do you expect margins to be the biggest challenge for banks in Q1 despite positive credit growth?
We foresee an increase in the blended cost of funds due to fixed deposit repricing, as higher-cost FDs make up a larger portion of Net Demand and Time Liabilities (NDTL). This phenomenon is exacerbated by muted growth in Current Account Savings Account (CASA). Most of the repricing on the floating-rate asset side has already occurred, particularly for prime corporate loans, which will automatically reprice to the lower of External Benchmark Lending Rate (EBLR) and Marginal Cost of Funds-Based Lending Rate (MCLR). Consequently, we expect a moderation in Net Interest Margins (NIMs) in the first half of FY24, with improvements to come once borrowing costs reflect rate cuts (depending on the clarity/consensus on the rate cycle reversal).
Currently, there is some relief for margins due to increased sentiment and disbursement velocity in high-yield segments such as commercial vehicles, construction equipment, micro-SMEs, and rural areas. These segments naturally offer higher yields and should support loan yields going forward.
In your recent report, you mentioned that SBI is likely to deliver positive earnings surprise. What factors contribute to this expectation?
We anticipate a positive quarter for SBI primarily driven by non-interest income. Last year’s Q1 results were affected by MTM losses and slower disbursement velocity compared to the current quarter. With stable margins and mid-teens growth, we expect strong performance from SBI.
How attractive are the valuations of frontline banks at present?
With the exception of ICICI Bank, most frontline private banks are trading at or below their long-term median valuations based on the price-to-book value ratio. Additionally, today’s book values are more reliable, with full recognition of asset stress and provisions. So, the current price-to-book ratio represents a more accurate assessment than in the past.
With the merger of HDFC Bank and HDFC taking effect, do you expect the impact of merger-related synergies to be visible from Q2 onwards?
The initial benefits, such as customer data translation and basic data mining, should occur relatively early in the merger process. However, the synergies resulting from this merger are extensive, involving multiple entities and geographies. These benefits will materialize over the long term if management executes the integration process effectively.
What are the immediate challenges for the merged entity?
In addition to the well-discussed challenges related to SLR/CRR/PSL affecting profitability and the drop in CASA proportion impacting funding economies, it’s essential to manage people-related issues during and after the integration process. Cooperation will be crucial for leveraging the synergies mentioned earlier.
HDFC Bank and ICICI Bank are your top picks in the sector. Both banks are currently trading at similar price-to-book multiples. Do you think HDFC Bank can command a valuation premium over ICICI Bank once again?
At first glance, it may appear so. However, there are other factors to consider. Looking past the subsidiary valuation, ICICI Bank is trading at 3.4x 1QFY24E core bank book value, while HDFC Bank is trading at around a 20% discount to the same value. Our 12-month target price for ICICI Bank is INR 1190 (20% upside), and for HDFC Bank, it is INR 2260 (34% upside), making it our top pick.
We have observed several reverse mergers in the sector, such as HDFC Bank, Ujjivan SFB, and IDFC. Why is this becoming a trend? Is there a regulatory angle to it?
In India, many companies, including banks and Small Finance Banks (SFBs), have suffered from holding company discounts for an extended period. These discounts typically arise from concerns about capital allocation within the holding company (such as cash flow generation subsidizing cash guzzlers) or varying levels of entity ownership by promoters, which can lead to spin-offs and mergers at unfavorable valuations for minority shareholders. However, in many cases, significant discounts have been present even when such concerns don’t exist. The introduction of NOFHC structures for new bank licenses in 2014, followed by similar requirements for small finance bank licenses, created substantial discounts for holding companies. As regulators favor merging these entities, it creates opportunities for value unlocking by eliminating these discounts.