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    Stick with big, quality players rather than looking for value: Aashish Agarwal, CLSA


    The real pick-up in earnings will happen when we start seeing a solution to the real estate problem.
    Among financials, we like banks with stronger deposit franchise and non-lending financials (like insurers and asset managers), over NBFCs, says Aashish Agarwal, Executive Director, Head of Research, CLSA. Excerpts from an interview with

    How do you see the overall financial space? Where do you see problems and which space is looking okay right now?

    In the financial space, we have a preference for the banking sector and the non-lending financing space over NBFCs. These are essentially life and general insurance companies and asset management companies.

    A few trends would continue to play out in the banking sector; a), banks will gain market share at the cost of NBFCs. b), Savings will continue to grow towards insurance and asset management companies. So these companies are in a sweet spot of high growth and decent profitability.
    The problem segment would be the NBFCs where most, barring a few good quality names, would continue to consolidate balance sheet, trying to deleverage and will face profitability pressure. Most NBFCs will struggle on growth and profitability and go through a long process of deleveraging which will help the larger NBFCs and banks.

    How do you read the Q2 numbers for banks and NBFCs?
    The Q2 numbers support the thesis we are running. The divergence is widening. There are some companies which are reporting acceleration in growth and improvement in profitability and there are others who are seeing a sharp deceleration in growth and pressures on profitability. Clearly, the former are mostly banks and larger NBFCs and the latter are the smaller NBFCs.

    "By and large, the real pick up in earnings will only happen when we start seeing a solution to the real estate problem. Housing sales should be the first lead indicator which will drive the earnings recovery."

    — Aashish Agarwal

    Can we see any bounce in earnings in the near term?
    Earnings will take some time to bounce back. There are certain banks which will have a very strong bounce in earnings because as the asset quality normalises, credit cost will normalise. But by and large, the real pick up in earnings will only happen when we start seeing a solution to the real estate problem. Housing sales should be the first lead indicator which will drive the earnings recovery. I do not expect a major uptick in consumption in the near term.

    Do you see any impact on asset quality due to job losses?
    It is still pretty early days for job losses. We have not really seen major job losses. There would be some pressure on retail asset quality for sure, particularly with the NBFCs which have lent to the riskier retail segment. Consumption financing NBFCs will see an increase in retail NPLs and credit cost. Some of it might spill over to some of the larger private sector banks which have concentrated retail portfolios. In my view, it will be fairly muted in the overall scheme of things, not really leading to disappointment in earnings as far as the banks are concerned.

    Public sector banks did not give any significant return in the past 10 years. How do you see the scenario going forward and what is your advice to investors?
    We still prefer private banks over public sectors banks barring one or two public sector names which we like because of their strong liability franchise. However, instead of that segmentation, we prefer to segment them into banks which have stronger retail franchise on the liability side and banks with not so strong franchise on the retail. There are at least one or two public sector banks with stronger retail liabilities and they continue to do well even as other public sector banks have not done well. Going forward, the trend will continue. Banks, whether private or public which have a superior liability franchise, higher CASA and more retail funding, will do better than banks which have weaker liability franchise, whether public or private.

    Do you think the government’s recent policy measures will boost the financial sector going forward?
    It is a step in the right direction. Of course, a lot needs to be done. What needs to be really acted upon is the speed. It seems that the policies might take more than a couple of months to translate into ground funding disbursements that could be slightly longer than what the market wants. We need an immediate dose of reforms which translate into bottom line at the ground level much faster as well.

    What kind of reforms are you looking for?
    A few like what was announced on the real estate side was a great thing. Beyond that, we could see some more reforms in the form of liquidity boost. At the same time, some comfort for banks lending to the NBFC sector could be needed. A lot of things are not getting resolved. There are a few NBFCs that have been under stress for quite some time. We need a closure to that stress process -- be it through acquiring some other entity or resolving their credit issues, or lenders taking a haircut. What is hurting more is the uncertainty rather than the problem itself.

    Which type of financial players do you like in this market?
    We like banks which have strong liability franchise whether public or private; that are the first cut. Second, we like banks which are in a position to take a substantial market share from the public banks because of either technology platforms or service levels and hence some of the smaller banks which have 1% or 2% market share but are very well ranked on technology and servicing platform, is the segment we prefer.

    The second segment outside of banks that we like is high quality NBFC segment, particularly with housing theme.

    The third segment we like is the non-lending financial space. So life and general insurance companies and asset management companies, once again with a bias towards the large players. The one theme that we believe consistently runs across the financial space is that big will become bigger and the industries will get consolidated. Hence it is better to stick with the stronger players who are quality names rather than go looking for value.
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