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Chat Transcript

Udayan Mukherjee

What does the banking stocks have in stored for you


Questions Answered


guest: Hi Udayan, Why all PSU banks have different price when all are capable and making NPAs to their best. Are they not all plane vanilla? All need infusion. Is it not time for government to keep only one major public bank and allow private banks to buy other small PSU banks? Tejas Mehta Investment Advisor SEBI Registered

Udayan Mukherjee: Hello everyone, good to be on MC again. I hear what you are saying, Tejas but reducing to a single PSU bank may be a bit extreme. Eventually, the number will have to come down, we certainly don`t need so many dysfunctional PSU banks. The optimal number may be 6-7. SBI and one dominant, relatively clean bank in each of the regions - north, south, east, west and central. For the rest, the process of NPA resolution has to expedited and then their scale of operation curtailed and finally merged with a larger entity. Yes, it will be unfair to shareholders of the larger bank, but since banks cannot be shut down, this bitter pill will have to be swallowed.

guest: Is there value in PSB or are they are just trading stocks?

Udayan Mukherjee: Value is not the question. Going by traditional valuation metrics, most PSU banks are undervalued. But what do you base any assessment on? How can you accurately predict what they are holding in their books. Even PNB was seemingly attractively valued, till the scam broke. The fact is that the asset books of these PSU banks is very opaque...you never know which loans they are evergreening, which lapse will suddenly be disclosed, catching you on the wrong foot. Therefore, simply going by presented facts may not be prudent. Having said this, these PSU bank stocks have corrected a lot, they are due for a trading pullback. If you are holding these names, particularly ones other than SBI, any such bounce may be a great opportunity to sell and switch to private sector names. If nothing, you will sleep better at night.

crestclub: Is there any sense in investing in any bank? Banks earn by lending money to business, so why not directly become a part of business, instead of going via media of a Bank which are known for all mischiefs!!!

Udayan Mukherjee: Interesting question. Indian investors, more than their counterparts in other countries, like to play the India growth story through the financial sector, which is why the banking sector has a disproportionately high weightage in the Nifty or any large index. Banks are of two types : ones that focus on lending to corporate entities mainly and others that focus on retail/consumer. The latter, though expensive, has a long runway of growth ahead even from here. Periodically, stocks prices will pause on account of valuation run up but generally they will trend higher. The corporate ones will move in cycles, they will have a good run for 4-5 years as a capex boom plays out and then they will go into a shell to clean their asset books. The bad cycle has been playing out for the last 4 years for corporate banks, maybe we are close to the end of it. So, for a long term investor it may make sense to continue holding the good retail banks and add only 1 or 2 corporate banks where the pain is slowly ending.

Vishal Jain: Hi Udayan, after the near-3000 point crash in the Senses, where do you foresee the Indices moving here on? Do you foresee further correction or crash these levels, consolidation phase or giant upmove? Thanks.

Udayan Mukherjee: In the near term, we may have some consolidation, because the fall has been sharp. The Nifty may try to work with its recent low of just under 10,300 as a base. A giant upmove seems unlikely in the current backdrop, the high of 11,200 should hold for the next few months. While the Nifty may consolidate between 10,300-10,800 , lower levels cannot be ruled out eventually. US and India bond yields are stiil rising, FIIs selling and local mood sullied by recent scams and the capital gains tax. So, Nifty levels of 10,100 or even the major support of 9700 cannot be ruled out completely.

hemant kamat: Do you see shift of investors from private Banks to PSU banks, in near future

Udayan Mukherjee: NO. At best, you will get a trading rally in PSU banks. Most of them have gone back to pre government recap levels, reflecting the market`s belief that a mere capital induction in unlikely to change things in the long run for these banks. Without more structural changes, they will keep on adding NPA`s and reporting scams like the Nirav Modi one. Private banks, most of them, have far more robust manegements and systems so there is no case, other than valuations, to make such a switch.

guest: What is the fate of Dena bank and IDBI bank stocks. Should I sell them. They were purchased at the time of ipod

Udayan Mukherjee: These aren`t great banks. The problems of each are well documented. The government`s plans on IDBI banks are also unclear and confusing. Sometimes they talk of a strategic sale, at other times not. In the sector, these are not the best exposures, for the long term. Unless of course, there is a corporate development on IDBI.

guest: Dada what is your take on PNB should we buy or wait

Udayan Mukherjee: Tough to say, though it has fallen quite a bit. A trading rally can happen anytime but that may get sold into. The damage of the reported scam will linger and hamper valuations going forward. In the banking space, management trust and credibility is key. PNB has lost a lot of that over the last fortnight. Also, these episodes sometimes turn out to be a can of worms. One piece of bad news leads to another, one has to be careful of that tail risk. Ok, bye for now. Wish all of you a great HOLI!!! Look forward to chatting again in March. Best, Udayan
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