Bank stocks a falling knife but you should catch them: Pro

Below is the verbatim transcript of Dipen Sheth’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.

Latha: Do you think Fed is going to be a non-event, fully chewed, discounted and digested that if the hike really comes it will be business as usual on Thursday morning?

A: I don’t know how long we have been chewing this cud so to say. For me I think it is not just the hike of 25 bps which I guess is all but on the table but what is the commentary going to be like in terms of further hikes and how is that sequencing going to be done. If they maintain that they are going to be data sensitive which they will, that is the stance, so a lot of the data is mixed out there and I don’t think we can take step hikes for another six-seven meetings just like that just because they raise it by 25 bps. We are near zero now so this is just a re-alignment in direction but I don’t think that direction is very well established. So, this is really a non-event. I would completely agree with Udayan, what he was saying a few minutes ago on your channel.

Sonia: Let us talk about some of the stocks and sectors that are moving. Everyone is talking, wondering how much more the banks are going to correct. How some of these private banks have completely fallen from grace in the last couple of months. Do you catch the falling knife or do you just stay away from these private banks?

A: It is an iffy situation. The fundamentals are definitely, the news flow which is coming in has been very bad for the smaller PSU banks, has been bad for the larger PSU banks and maybe a little less than bad for the large private sector banks. I guess you are specifically referring to Axis Bank and ICICI Bank where a lot of value destruction has certainly taken place if you just pull out the charts over the last three months or something and you will see what has happened.

The fear is common, across the board, except that it reflects much stronger in the valuations of the smaller PSU banks. However, here too, the larger sense is that the private sector banks may not see as much damage in terms of incremental slippages. So, I think they are all in the buy zone whether it is Axis Bank, whether it is ICICI Bank. It is not a conviction buy zone because right now the headline news flow which comes through every week from the Reserve Bank of India (RBI) at least, at least the errant borrowers, so the naughty kids in school are going to be punished by the principle and who suffers, the class teacher. So, a little bit of that will play out with Axis and ICICI.

However, to my mind there is no doubt, particularly on Axis I will say this with emphasis, that the quality of lending should simply not be compared with the kind of quality of lending that we have seen at the some of the smaller PSU banks. It is reflected only partly in their valuations and this valuation divergence which has narrowed should actually expand as you move forward and many of these problems do get resolved. The worry is that the economy is sluggish and a whole lot of places where you have stress formation are not corporates who are going to get cured overnight. So, yes, you have to get out and catch these falling knives somewhere. At least they have capability, franchise, capital and large fat networks.