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'PSBs are sitting on liquidity, but are not lending'

By Shreepad S Aute
August 22, 2019 09:00 IST

'What will help deposits grow is lending by State-owned banks. They have loan-to-deposit ratio of 65 per cent. For private banks, it is 85-90 per cent. However, if 65 per cent of the system does not lend, then you don't see the money multiplier work.'

Photograph: Rupak De Chowdhury/Reuters

The recapitalisation of Rs 70,000 crore announced in the Budget is expected to take care of regulatory and growth capital requirement of PSBs. Anil Agarwal, head of Asian (ex-Japan) financial research, Morgan Stanley, tells Shreepad S Aute that reduction in NPAs will support banks' margins. 

 

Edited excerpts:

What makes you positive on big banks such as Axis Bank, ICICI Bank, and State Bank of India?

Last year, our call was that asset quality outlook will improve and will drive stock performance.

Valuations are now above the long-term average.

Non-performing loans (NPLs) are slightly below expectation; that is not going to move the stock much.

The positive thing for large banks is that competition is largely reducing.

The challenge for wholesale-funded institutions -- whether it's a bank, NBFC, or an HFC -- is that they cannot lend as they are struggling with liquidity.

In such a situation, if you have capital and liquidity to grow, which these large banks have, you can grow your loan book at any rate.

The only constraint on asset growth is how quickly they grow deposits.

If you look at the margin side or net interest margin (NIM), large banks are seeing pricing power.

Their spreads are improving, and thus, core earnings are very strong.

Plus, from a cost perspective, banks are at the forefront of using tech to bring down costs.

The cost growth will not exceed 13-14 per cent, against revenue growth of above 20 per cent.

When do you see the situation of deposit growth lagging credit growth normalise?

The problem in India is financial savings.

Deposit growth is weak, financial savings have come down.

I don't think they will get sorted easily unless deposit rates rise.

You are competing with government-backed instruments, which are giving 7 per cent.

What will help deposits grow is lending by State-owned banks.

They have loan-to-deposit ratio of 65 per cent.

For private banks, it is 85-90 per cent.

So, PSBs are sitting on liquidity, but are not lending.

Every deposit is a loan to the banking system.

However, if 65 per cent of the system does not lend, then you don't see the money multiplier work.

What is the current valuation trajectory for banks and how much expansion in valuation do you see?

I look at price-to-core earnings.

The reason is that for price-to-book value, we have to look at the return on equity, which has stacked up.

If you look at big private banks, they all are trading between long-term averages, or slightly above that.

With global interest rate cycle turning and Indian rates going down, crude oil prices are sluggish.

I won't be surprised if these valuations in the next 12 months actually go meaningfully higher.

Should NBFCs be avoided?

The problem for them is to get liquidity to fund their balance sheets.

So, parts of NBFCs or HFCs, which are struggling and might continue to struggle, are generally not liked.

Shreepad S Aute in Mumbai
Source: source
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