Piper Serica’s Abhay Agarwal Isn’t Worried About High Valuations Of One Set Of Stocks

Abhay Agarwal: There are two reasons for that. One is a structural business issue that these banks are now struggling for two things. One is access to cheap deposits, which drives their margins. I think that access to cheap deposits in the form of constantly increasing CASA (current account, savings account) has probably hit its upper level now and I think incremental gain if any is going to be pretty small. So there is going to be a cost-side inflation as depositors want a higher return for the money that they put up in these banks.

The second thing is that the opportunity space on the credit-side is very competitive. If you want to go and lend to very good quality corporates you know, that’s become very competitive with PSU banks also becoming very competitive. In fact, SBI and Bank of Baroda are giving all the private banks a run for their money as far as corporate finance deals are concerned.

So where do you go? So then you go to retail and retail is a large franchise, but again, as long as you’re going to do mortgages or secured lending, the margins are limited. And then, willingly what you’re left with to drive aggressive growth in the book and margins is to drop down to unsecured lending or close to that. Now that is a space that is infested with microfinance companies, small NBFCs who do a very good job at that.

So I think the large private banks, most of them, are really struggling for growth right now because either they sacrifice credit quality or at the same credit quality the growth is going to be not equivalent to what it was and that is the fundamentals part.

The other part is the technical part. Now look at the valuations. As you mentioned, they are probably (at) one of the lowest end of the valuation range, if we go back to last 15-20 years. But at the same time, if you’re an FPI investor, if you are a foreign investor, who doesn’t really have to invest only in Indian banks, you would look at Indian banks and say, ‘Wow, these are the most expensive banks in the whole world you can buy.’ You look at Citibank, Bank of America, JP Morgan, all these are trading also at almost single digit book value 1-1.5 times book value multiples, international level franchises that are fairly de-risked, because of their global nature. So, as an FPI investor, you always toss up and say, ‘Look, instead of buying a very expensive Indian bank, may be I could just buy a Citibank, if I need to increase my banking allocation.’ And you look at some of the Chinese banks, which are trading at ridiculous 0.3, 0.5, 0.25 times book value.

So,if you look at the technical factor, and if you look at the fundamental factor, I think the question is what kind of return can you generate backing these big banks now. Are they going to go into a business restructuring technical valuation correction zone for some years before you start looking at them again.