He also expects the banking sector to perform badly given the current macro economic scenario. Keeping that in mind, he is neutral and cautious on the banking segment, but recommends a defensive stock such as HDFC Bank .
Also read: Prefer HDFC Bank, says Dhirendra Tiwari
Below is the edited transcript of his interview to CNBC-TV18.
Q: Are you surprised or not at all with this 25 basis points (bps) base rate hike by ICICI Bank?
A: We are not surprised. We have seen other banks doing it as well. Private banks are focused on their margins and they had indicated that if there is any increase in cost of deposits, which is of a more durable nature they would go ahead with the base rate hike.
Clearly, the way situation is evolving, the increase in interest rates at the short end is likely to be more durable than thought earlier. Hence it makes sense. The pricing power is there with the private banks right now.
Q: Does a 25 bps base rate hike offset all increase the cost of funds that banks have seen and therefore margins should be maintained for these banking names or it is not sufficient?
A: We do believe that 25 basis points should be enough to cover the margin for the next quarter because there is a large amount of loans that get re-priced instantly while as far as the cost of funds although they have gone up by more but large part of the deposits don't re-price very quickly. So, from that standpoint I think this 25 basis point should be enough to maintain margins in the coming quarter.
Q: You said banks won't take any hit on margins at all in this quarter. As such the kind of correction that we have seen in larger private banks; would you recommend investors to buy some of these stocks?
A: Although on the margin front, we do believe the private banks would maintain them. But the broader environment remains challenging. So, it is not that we are turning positive on the sector, but within the pack, defensive stocks like HDFC Bank can be recommended. Broadly on the entire sector, we are cautious and neutral and not really recommending any buying because the overall macro environment is quite negative.
Q: Do you see this hike in base rate and therefore lending rates impacting credit growth? Already credit growth estimates for the entire banking industry has come down to a great extent. What happens to the asset quality incrementally bad news?
A: Definitely as far as credit growth considering where gross domestic product (GDP) and nominal inflation etc are, credit growth will come down to about 10-12 percent levels.
The only thing which is keeping it up is to an extent the restructuring really postponing repayments of loan. So, it is really more of an artificial growth that we are seeing even now.
So, definitely in terms of core growth we would expect credit growth to continue to inch downwards. As far as asset quality as well we are very cautious. In this environment second quarter would be very challenging and even the next 2-3 quarters infact appear quite challenging.
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