For all the naysayers who criticized HDFC Bank and its underperformance against ICICI Bank and SBI, do you think they are now refusing to accept the correction?
I can’t say the rest, but we always maintained that there was this consolidation phase related to some of these technology issues and it seemed like we had a positive view of HDFC Bank.
In this sense, banks have had a long period of consolidation over the almost one and a half years and valuations have also been corrected to reflect this. So on a fundamental basis, even before the merger, in terms of anticipated growth, the numbers for this quarter came out and they were pretty solid.
It was back to those numbers where they would grow 18% to 20% of their backlog. He’s started to show signs of that revival and I think it’s time.
Once this merged giant emerges, what does it mean for other players in fintech and finance? We were talking with a few experts and they told us that the comparison would be with SBI. What does this really mean for others in the business now?
One thing is very very clear, the banking sector is in consolidation mode and we saw all of this after 2018 when the whole IL&FS crisis took place. The NBFC sector was in consolidation mode. Thus, the small NBFCs are far from their levels where they were in this growth phase.
Likewise, if you look at most tier two, tier three banks, they’re nowhere near the kind of market capitalization they had before 2018 or even before Covid and so on. This is a sector that is in full consolidation. At one end will be those larger players who have been able to shore up the balance sheet and raise capital at attractive levels, raise deposits nearly 200 basis points below their tier two competitors, level three.
This means that with credit growth we see that at the first signs the best customers are going to be taken by these banks and the tier 2 banks will have to go after customers with a slightly riskier profile because the cost of fund is higher. So this is a phase where we’re going to see the four major private banks and maybe SBI gaining increasing market share and becoming a bigger juggernaut.
The entire mortgage space had gone through a consolidation phase where the kind of issues we saw after 2018 were posting where HDFC and LIC were going after the banks. Now that HDFC is becoming a bank itself, the whole mortgage space is going to be very interesting again.
We will still see the share or the mortgage of the banks increase. The way we see it is that the size is going to get bigger at one level and so that’s where the HDFCs of the world will be competing. Then there will be so-called emerging, very nimble fintechs that will use technology as a tool. However, over a period of time, unless, as in the case of Paytm, they develop a risk management framework for lending, they will either be taken over by these big players or backed by a private equity fund. to reach a critical size.
So we’re going to have those two extremes and I clearly don’t see how tier two, tier three banks are going to capture value unless there’s some kind of merger happening there to create an entity one bit larger.
What a year it has been! Some mega-deals have been put on the table. Other than HDFC fusion, earlier we had PVR-INOX and then there was Axis-Citi. How have you interpreted the contours of the Axis-Citi agreement now that it has been settled?
It’s definitely quite interesting. Even across private banking or wealth management, we’ve seen a lot of action. On the one hand, private equity players are becoming more and more aggressive. Previously, in ASK, all wealth management had been taken over. Then we had the takeover of IL&FS Wealth, Bain Capital. So we have private capital flowing into some of them, and then we have the banks wanting to increase their share of other income, which has been a very healthy component in the past for banks like HDFC and so on.
So in that sense there’s across the spectrum of financial services, whether it’s the wealth management space or the NBFC banking space, all of this stuff is happening, which is heading again towards a trend where the big ones are getting bigger and gaining more and more and more market share. This is the time when if you’re small, you have to be very, very focused and have a lot of expertise in the field to be able to meet some of these big behemoths.
How did you read the auto sales numbers for March?
The numbers are basically a continuation of the numbers we’ve been seeing for some time. Utility vehicles continue to benefit from the entire history of government-led capital spending, etc. They continue to do well. We’ve seen passenger vehicles do well thanks to companies introducing new models. Tata Motors has been at the forefront, Maruti has missed out on the fact that its new models have yet to appear.
Among other companies, there is something like Kia supported by the introduction of new models. So if one had updated the wallet with newer variants and models, one would have done well. The passenger vehicle segment remains buoyant. Two-wheelers is a space that has struggled and continues to show signs of struggle given that rural incomes are going to be quite low.
What we saw there was a continuation of a trend that we have been observing for several months as such. It’s something where we don’t see anything drastically different happening unless and until rising food prices actually support the rural economy, and then we can see two-wheelers come back. But we won’t know until after the monsoon.
What is the outlook for the insurance industry?
We love insurance business and as such, life insurance is the closest safety net that most Indians have in the absence of any social security. Penetration is not very high yet. Life insurance still has a long way to go in terms of growth and some of the very well run companies in this segment – be it HDFC, SBI, ICICI, Max – will continue to do well and grow. to be the leaders in this field.
As for the AMC pack, there are big SIP flows and the assets continue to grow and a lot of those SIP flows are in stocks which are higher yielding assets. There is this concern that emanates with respect to the growth of ETFs and the fact that ETFs are low yielding products and the impact that they could have. We’ve seen most AMCs go through a tremendous consolidation phase when it comes to stock price performance over the past 1.5 years. It’s a long story of growth that will play out and we are positive in these two areas of activity.
What do you think of earnings season? What do you work with in terms of IT business profits?
You have to look at the short as well as the long term. The longer term image of IT continues to remain very vibrant and positive. We’ve seen the results of Cognizant coming out and the kind of outlook they’ve given in terms of growth. The long-term outlook therefore remains very solid.
In the shorter term, pricing pressures from high labor costs will weigh on IT companies to some degree, but there are multiple levers in terms of which part of the pyramid they hire and who will play. Larger ones are known to handle margin pressures much better than, say, mid-tier and second-tier companies as such.
In IT, short-term challenges aside, we continue to be very positive and I believe they are in a cycle and over the next few years that should see very strong numbers growth.