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Corporate credit growth to be back in a few quarters: Vinay Sharma, Reliance MF

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The stage seems set for banking sector performance in the medium term, said Vinay Sharma, Equity Fund Manager, Reliance MF, in an interview with ETNOW.

Edited excerpts:

How do you see overall fundamentals shape up in terms of credit growth for the banking sector? You are fairly confident now that the NPA woes seem to be tapering off. Has that been a key catalyst for growth?

Yes, of course. If you look at the banking sector from a context of last four-five years, India has probably seen one of its worst corporate NPL cycles in a few decades and over the last two-three years, profitability of a lot of banks has been suppressed because of higher NPLs in the system.

In the medium term — over next 2-3 years — we are starting on a relatively clean balance sheet. A large part of corporates have started the deleveraging process. We have new mechanisms in terms of bankruptcy and IBC codes to fast-track some of these cases and therefore the overall impact would be better profitability and also normalised profitability for the banking system as a whole and particularly for the corporate facing banks, which have suffered the brunt of the NPL cycle for the past few years.

In that context, valuation seems fairly reasonable whether you look at them on an absolute basis or on a relative basis compared to their own history. Therefore, the stage seems set for banking sector performance in the medium term.

Coming to credit growth, we have seen some improvement there for the past few months, some of it is due to base effect, some of it is genuinely happening. There is some growth in certain segments, particularly in the retail and housing sectors which have shown good growth over the past few years, when corporate credit growth was languishing.

There is no reason to believe that that trend will not be able to sustain itself. This is because retail and housing and a large part of retail credit is a hugely underpenetrated segment in India and therefore that story can continue for many years. And when it comes to corporate credit, now that a large part of deleveraging has happened and resolutions are taking place in the system, in a few quarters even corporate credit growth will come back. This is dependent on the private capex story picking up in India but we believe that t as well.

Overall in the financial system, banks have a certain competitive advantage today when it comes to growth. Last few years had seen some financial intermediaries taking market share away from banks. We will see an absolute opposite of that over the next two-three years and banks should be able to claw back some of the market share from these financial intermediaries because of their deposit franchise.

If you look at an amalgamation of all these factors, it looks like credit growth should improve from here and in the credit growth, the share of banking credit should improve compared to last few years. This is why we are fairly sanguine on both credit growth and overall banking system outlook.

What about PSU banks? Would you up the investment in public sector names?

If you look at the last four-five years, the brunt of the corporate NPA cycle was taken by banks which five-six years back were corporate heavy in their balance sheets. For most of the PSU banks, probably more than half of their balance sheet was occupied by corporate loans of some nature and to that extent get normalised as profitability returns and markets gets more confident that PSU banks are now back in black. NPL trends are declining sustainably. We should see valuations catching up there as well.

One must appreciate that even in these tough periods, some of these banks — particularly the large ones — have not really lost their deposit franchise. The value of deposit franchise comes to the forefront when interest rates and liquidity in the system were slightly on the tighter side. To that extent, we do like PSU banks, particularly the large ones, and the ones where we do not see capital as a problem and equity dilution as an issue for Read More – Source