Prefer IndusInd and Yes Bank to HDFC Bank: Nilesh Parikh, Edelweiss Fin

a-forensic-guide-for-crime-investigatorsIn a chat with ET Now, Nilesh Parikh, Edelweiss Financial Services, says from a banking financial space perspective, the pecking order is IndusInd and Yes Bank followed by HDFC Bank and then Axis and ICICI. 

Edited excerpts: 

So much is happening in banking. Talks of a merger are being denied. There is a small window of flash sale in HDFC Bank that gets over in four hours and talks of a large private sector bank buying into a large microfinance institution as well. What are you telling your clients to do? 

We have gone through a phase of demonetisation and the results are already out in Q3 and we have seen different sets of banks reacting to the challenges that were posed. So you have some of these new generation private sector banks like IndusInd Bank and Yes Bank doing reasonably well capturing the opportunity which is being thrown up by the entire demonetisation exercise. 

On the other hand, some of the other banks were weigh down by this entire exercise. There was slower credit growth and asset quality resolutions which are getting pushed back. There is a clear trend which is emerging in terms of divergence even within the private banking space. Earlier, we used to have a clear cut demarcation between state owned banks and private sector banks but post demonetisation, there is a clear trend which is emerging within the private sector banks also. Some of the banks are able to cope up quite well and some of them are finding it a bit difficult to get back to their normalcy. 

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Do you agree with my assessment that anything could happen but for the moment if one has to put 2×2 together, Kotak Mahindra Bank and Axis Bank may not be a very easy merger? 

You cannot rule out anything in financial services but if I completely agree it is not even as if they were to get together. It is not going to be a very smooth ride in terms of the quality of book and the absolute share size of Axis is larger for Kotak to consume without any hiccup. Definitely, it is going to be a challenging one to get through. I would not rule out anything at this point of time. But yes, it is definitely a difficult one to get together. 

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It is about whether or not the entire banking sector is headed for some big time consolidation because very often there is buzz about some big consolidation, some big merger happening in the space. Do you think consolidation is the way to go forward not only in telecom, but in banking as well? 

Basically, the consolidation would be restricted to state owned banks with the struggle for capital and asset quality. There will be more forced consolidation in that space. For the private sector banks it will be more opportunistic. There has been talk about one private sector bank looking at acquiring a large MFI. I would assume it has been more opportunistic to build capabilities in that set of businesses but that is still likely to be restricted if you ask me on the state owned banks side. 

One surprise move compared to the largecap names is not a surprise really but an eye popping move. Yes Bank this year is 100%. Even after that QIP drubbing that the stock got, it has actually recovered and it is trading at new highs right now. What do you do? What is the pecking order in the private sector banks namely IndusInd, Yes, Kotak, HDFC. I will probably throw in ICICI and Axis as well? 

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Our picks at the top end remain Yes Bank and IndusInd Bank which given that they have limited problems on the asset quality side and which got a leg up in the entire demonetisation exercise. We see them outperform the bankex by a strong margin over the next couple of years. On the other side, in HDFC Bank, we continue to like the name but the outperformance would be more with some of these new generation banks like an Yes and IndusInd and corporate focussed banks like Axis and ICICI. I would actually rate them lower than IndusInd and Yes Bank given that the entire resolution process we have seen, the recognition from asset quality perspective, we are done with may be a quarter here or there but the entire resolution for the recovery is going to be a bit stretched and may spill over to the second half of FY18. Till that time, it will be very difficult for these stocks to actually give meaningful returns. So from a banking financial space perspective, the pecking order is IndusInd and Yes Bank followed by HDFC Bank and then we would probably look at Axis and ICICI. 

Do you think for HDFC Bank we would be get another 10% return in next one year? On a decent year HDFC Bank gives you about 14-15% return which is a very super return if you are an institutional investor but because of technical factors, 14-15% gains for HDFC Bank have been slightly front ended which is that we have got in the first six weeks? 

I agree it is a technical aspect but from an investor’s perspective, at least one bank where they can sleep peacefully and not bother about the volatility is HDFC Bank. From that perspective, I do not think investors would settle for a less than 10% to 12% of absolute returns without volatility.

Source: Economic Times