Outlook On Private Banks Post Q2 Earnings
Hercules Advisors' Aditya Shah analyses private banks' Q2 earnings report card. #BQLive
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00:00 Good morning and welcome to BQ Prime. You are joining us on this special broadcast where
00:03 we are discussing the Q2 results from various private banks that have announced their numbers
00:09 over the last couple of weeks, most important of which of course is Kotak Mahindra Bank.
00:14 Now, as you know, Kotak Mahindra Bank did report its numbers on Saturday where they
00:19 announced that their net profit has grown by about 24% largely because of an increase
00:23 in the net interest income. But what is more important in the Kotak Mahindra Bank case
00:29 is the announcement of a new CEO. Remember that on the 2nd of September, Uday Kotak,
00:35 the founder, MD and CEO of Kotak Mahindra Bank, suddenly resigned from his position.
00:39 He was supposed to only retire by 31st of December, but he announced his resignation
00:43 about four months in advance. And at that point in time, he had said that the bank had
00:48 sent out some names of potential successors to the Reserve Bank of India and that the
00:53 bank was awaiting the RBI's announcement in this regard. So on Saturday, Kotak Mahindra
00:58 Bank said that the RBI has approved the appointment of Ashok Vaswani as MD and CEO of the bank
01:04 for a period of three years. Now, he's supposed to take over any time before the 1st of January
01:08 2024. And according to the bank's management, when they were addressing reporters, they
01:13 said that he would probably join around in December because currently he's working as
01:17 president at Pagaya Technologies, which is a US-Israeli AI firm. To discuss these numbers
01:22 further as well as the impact of all of this on the stock, we have with us Aditya Shah,
01:28 founder of Hercules Advisors. Aditya, welcome to this conversation. I want to start with
01:33 the Kotak story. What do you think of the new CEO appointment, especially because it's
01:37 an external candidate as opposed to the speculation which said that the internal candidate would
01:41 probably succeed Uday Kotak? So the RBI has got its way. The RBI wanted that there should
01:49 be an external candidate so that de-risking of Kotak Mahindra Bank happens away from Uday
01:54 Kotak Mahindra Bank. And that's what has really happened. Ashok Vaswani, who has got rich
01:58 experience across Citibank, across all blockades has come in. Mind you, he's not very young.
02:03 He's 63 years of age and he wanted an external candidate. So net-net, I'm very happy that
02:08 the hangover from the stock per se has gone about who's going to beat the bank. Now, what
02:12 is going to happen is the new candidate, Mr. Vaswani, is going to come. The market is going
02:17 to really understand what are his strategies, how does he want to beat the bank really forward.
02:22 And that's how the market is going to judge Kotak Mahindra Bank. I also don't believe
02:28 that Uday Kotak's influence over Kotak Mahindra Bank will go away so fast since he's the largest
02:33 promoter shareholder of the company. So Uday Kotak will be there in the background. Meanwhile,
02:38 Ashok Vaswani will now create new strategies for the bank to come out. So net-net positive
02:43 for Kotak Mahindra Bank in the longer term. However, we need to wait and watch when he
02:47 joins in and see what the strategies will be.
02:50 Yeah, it's interesting that you bring up the Uday Kotak point because he has been appointed
02:54 as a director on the board, of course, by the shareholder. So he's going to continue
02:57 there for a five-year period as opposed to a CEO's tenure of three years. So he's essentially
03:02 there at the bank longer than the CEO is. But interestingly, the numbers that came out
03:08 on Saturday, a lot of analysts called it a mixed bag sort of results because while, yes,
03:13 the profit and net income numbers have been strong, you did see some slippages come in
03:18 because of the unsecured lending portfolio of the bank. And that is something that the
03:23 bank is closely watching. Any views on that?
03:26 So, you know, our governor has already said that he's watching the unsecured loans very
03:34 carefully. And you yourself had put out a tweet saying that the bank had given up 50,000
03:39 crore rupees of loans, considering the fact that unsecured is going very fast and unsecured
03:46 is going to come in. For Kotak Govindra Bank, I'm not too worried per se because they have
03:50 got one of the cleanest books and Uday Kotak generally took away all the NPAs that are
03:55 there without hiding them. So not to worry there. The slippages were at about 1300 crores,
04:01 which is purely okay from that perspective, not for it too much. What I really want to
04:05 see is going forward on the secured and unsecured side, how fast they really want to grow because
04:11 the RBI governor has now really warned on the unsecured side of it. So I believe that
04:16 the unsecured growth of Kotak will start to slow down and they will start to focus more
04:21 on the secured piece of it. So not to worry on the reserve side of it, even the NIM contraction
04:27 that Kotak already had. Kotak has the best NIMs amongst the top banks at about 5, 5.15%
04:35 and there's nothing to complain per se about that. So Uday Kotak is leaving a very healthy
04:39 bank for the successor, unlike the S-Bank where there were a lot of problems, a very
04:44 healthy bank, a very good credit culture within the bank. So not to worry per se on the slippages
04:49 in this bank. I want to talk about the other bank that announces results on Saturday, of
04:54 course, ICICI Bank, the second largest private bank in the country at this point in time.
04:59 ICICI Bank, I know that you've repeatedly talked about ICICI as the next HDFC and sort
05:05 of better placed to tap into the broader economic growth in the economy. You saw a 25 bps dip
05:15 in the net interest margin for ICICI, but otherwise the numbers were pretty strong as
05:20 far as the banking pack is concerned. To your mind, what is something that people should
05:27 watch out for at ICICI? Nothing per se. ICICI is predominantly a retail
05:34 bank now. 56% of the loan book is now on the retail side of it. So there probably there's
05:40 no problem per se. The bank is very capitalized. The slippages are well within control and
05:46 the provision coverage ratio is also very strong. So I think that over the next two
05:50 to three years, ICICI Bank will do pretty well. Of course, the valuation there are not
05:54 cheap anymore. It now trades as the most expensive bank, given the fact that it trades at three
06:01 times price to book. So in my view, nothing to complain about per se. I will want ICICI
06:06 Bank to not go unsecured retail too fast, because there is a bubble that is getting
06:12 built up there. And a lot of banks will get caught over the next one or two years. So
06:17 in my opinion, ICICI Bank is a story of a lot of stability. While HDFC Bank undergoes
06:22 a lot of transition with the merger, ICICI Bank will be there to pick up the pieces.
06:27 So the next two years, we will have three banks, HDFC Bank, Kotak Bank, and ICICI Bank,
06:33 which will lead credit growth in India. So India is poised for a very strong credit growth,
06:37 very strongly capitalized bank, and nothing to worry about per se. On ICICI Bank, I don't
06:42 feel that there were any misses. Small misses were there, but that's really OK. It's a business.
06:47 In my opinion, very strong numbers from ICICI Bank. And the stock price is really showing
06:51 that it has padded only about 100% in the last two years.
06:55 Right. Touching on the unsecured piece a little bit further, I want to dig a little bit deeper
07:00 than what the headline says. So of course, yes, the RBI has cautioned against rapid growth.
07:06 There are reports which say that the small ticket size loans in the unsecured is where
07:11 the stress is largely emerging from. You know, the tweet that you had mentioned that I put
07:15 out, so that was specifically for loans under 50,000. And that's where ICICI Bank has said
07:21 that they don't have any meaningful presence, neither do they intend to grow their business
07:24 there. But that piece is where your smaller to midsize private banks, as well as NBFCs
07:31 and fintechs sort of tend to play high turnaround business, you know, obviously a better yield
07:38 on those advances. But is the party over in your view?
07:43 Actually, I am even on the Dash Finance call and Ravindra Jain clearly cautioned about
07:51 the mistracing that is happening on the small ticket loans and the unsecured side of it.
07:56 Unsecured is a highly risky business where there is no secured asset per se and the yields
08:01 are very, very high. So the credit costs are also very high. In my opinion, the party is
08:06 going on. The party will stop in the next one and a half year. And this leg of NBFC
08:12 cycle will not be corporate NBFC cycle. This will be a retail led NBFC cycle per se. And
08:17 all those lenders, banks, NBFCs who are going very, very aggressive, unsecured retail loans,
08:24 I would be really very worried there. So in my opinion, a good bank, a good lender has
08:28 to have a balanced approach as Kotak, as HDFC and ICICI have. Both secured and unsecured
08:34 piece are going steadily and they are not going too aggressive on the unsecured side
08:39 of it. So the party is going to continue for the next 6 to 12 months after which there
08:44 are going to be, there's going to be a retail NBFC cycle that we have never seen before
08:49 in this country. And that is sure, it's just a matter of time before that comes.
08:54 So to your mind, the provisioning situation seems pretty strong. Most banks are carrying
09:01 about 70 odd percent, at least the private sector is carrying about 70 odd percent on
09:05 the provision coverage ratio. Do you think that's going to be enough to cover for any
09:10 future losses? Or do you think that probably the losses are going to outpace the provisions?
09:16 So what really happens is large private sector banks have a huge profit pool and they can
09:20 afford to take a small or even a bigger and bigger hit. The problem will start with the
09:26 smaller lenders where the profit pool is not really that great. And any hit or any rise
09:30 in slippages will then mean a hit in the profitability and they will have to raise up. So companies
09:36 that are unsecured, known and growing very, very fast and the profit pool is just 1000-2000
09:41 crores is a problem. And smaller private sector banks and also smaller NBFCs is the problem.
09:49 Companies like HDFC Bank where the profit pool is about 10-12,000 crores every year,
09:54 I don't think that there is a problem. Even on Kotak or even on ICICI Bank, there's no
09:58 problem. In fact, on ICICI Bank, we are sitting on a provision coverage ratio of about 83%.
10:03 And they have got a management overlay per se on the provision. So I don't see these
10:09 machines have a problem. The machines that do have a problem are the smaller private
10:13 sector banks.
10:15 Right. Althea, I see it seems that we have lost Althea's voice. But just to wrap up sort
10:24 of the points that he raised, things are looking good for ICICI Bank. For Kotak, of course,
10:30 a change in management, that's something that's going to be closely watched out for. But he
10:34 doesn't see any sort of major shakeup within the Kotak Medra Bank system. What is going
10:41 to however, worry analysts and market watchers in general is the fact that unsecured lending
10:47 as a piece is starting to show signs of stress. And that is likely going to create a sort
10:53 of new NPS cycle within the banking sector because a lot of banks as well as NBFCs have
10:59 been growing really fast on that portfolio, especially the sub 50,000 sort of loan ticket
11:04 size, which are considered small ticket size in general. That's where the stress is coming
11:11 from.
11:12 What we also understand is that going ahead, the larger banks are more or less pretty much
11:17 well placed as far as the provision coverage ratio is concerned. But the smaller banks
11:20 who have a smaller profit pool, they may not be able to provide for these loans. That's
11:24 what Althea Shah of Hercules Advisors had to point out.
11:28 Thank you so much for joining us on BQ Prime. Do keep watching through the day. We have
11:31 a lot coming.
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