Betting on private banks, HFCs & select private insurers

The size of opportunity in banking is large as India is still an underpenetrated market. Any bank which has a strong franchisee on both asset and liability sides is best poised to take advantage of the upcoming economic recovery.

We are seeing some signs of an economic recovery and this is showing in credit growth which is now at 11% from 5-7% earlier. The results will be visible in the March quarter.

If a recovery happens, you could see re-rating for corporate but it would be in sync with the receding of asset-quality problems. We have a Rs 10-12 lakh crore problem, and there is a provisioning of 35-40% on total stress. Every year, when provisioning is done, their coverage also goes up. Resolutions happen through M&A or insolvency proceeding. So, the problem reduces over time. So, if problem reduces and coverage improves, the impact of bad loans seen earlier will be less visible.

Many stressed sectors like steel are doing well, due to the rise in prices. Gradually, recovery will percolate to other stressed sectors in 2019 and 2020. So, ultimately coverage will go up and credit costs will come down which will lead to higher return on equity. We believe that 2020 will look better than 2019.

We want a blend of private banks with retail focus and very less asset quality problems. We like corporate banks where the worst is behind us. We believe there are secular opportunities in private banks, housing finance and select private sector insurance companies.

Housing finance companies are not cheap with valuations ranging from 3.5x to 6x P/B. Select NBFCs are expensive while in certain pockets, there is overvaluation as well. Hence, one needs to be careful and take a case by case approach.

If you compare India with China, the opportunity in insurance is very large, due to low penetration. Select pockets look promising from a 5-year-plus perspective in the private insurance space.