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rbi: Another RBI rate hike likely; smaller banks will see more contraction in NIMs: Deepak Shenoy

“Among larger emerging market countries, India is one of the few that is standing out in comparison. Brazil, Russia and China do not seem to be exactly in the most favourable of conditions. When inflows come back, they should come back to India but right now, flows are not coming anywhere. In fact, they are going more towards the dollar,” says Deepak Shenoy, Founder, Capital Mind.


What do you make of the overall India setup versus the rest of the world? Do you think that once flows turn, the Indian market can once again start to go up?
Today is not very indicative. If you remove Monday’s muhurat trading day, we are actually up about 0.5% and it is not really relevant in the overall sequence of things. We are seeing India being a standout economy compared to the rest of the world. Even China has seen a pretty sharp fall in both Hang Seng and Shanghai indices on Monday and on Tuesday it was marginally up.

So it seems like among the larger emerging market countries, we are one of the few that are standing out in comparison. Brazil, Russia and China do not seem to be exactly in the most favourable of conditions. So yes, when inflows come back, they should come back to India but right now, flows are not coming anywhere. In fact, they are going more towards the dollar. For some more time, flows may go out rather than come in.

Just wondering if it is turning out to be a problem of plenty when it comes to banks. Outside of and , what would you recommend buying still?
Going forward, the banks have seen some prosperity. The credit growth numbers that the RBI released as of last week were at a multi-year high. We are talking of 2019 levels or higher – 16.75%. We are seeing banks get an advantage because they are able to pre-price and are lending a little bit earlier but the liabilities have not yet been re-priced.

I think this margin increase is currently temporary and therefore a lot of banks that are showing great numbers, will see contractions going forward. Even today, I was watching the bond markets and in the short term, in the bond, the commercial paper and CD markets, we are seeing players raise at above 7.4%, 7.5%, even for six months to seven months.

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So we are getting a re-pricing of short-term liabilities across the spectrum. This will eventually come into deposits and when that happens, a lot of banks will show smaller NIMs going forward. We have to be careful about that. A lot of the small banks have shown some signs of recovery. I am just waiting to see how repricing works for , J&K Bank, .
The most interesting among these seems to be Federal Bank because some of the new-age start-ups are partnering with them and helping them increase their franchise. But I would not write off some of the other banks. Maybe once the results of all these banks come, we can figure out how things happen. We have to understand that there is going to be another RBI rate hike. The smaller banks specifically will see more contraction in NIMs compared to the larger ones.

In terms of banking names, would you prefer PSU names? Only Canara and one or two others have declared numbers and that is the space where a lot of numbers are pending.
I would not actually because I think SBI is one of the most aggressive players in this space but the rest have not really shown aggression. We are more keen on the private sector. Having said that, what is coming back quite strongly right now is capex and there is going to be a slowdown in capex if interest rates tend to increase too much.

Given this, I would not touch a PSU bank right now other than for a short-term trade. India Bank in particular stands out, it has been a standout bank even earlier wherein they merged it with these other banks and kind of ruined the profile. But it still seems to be coming back. That might be one interesting public sector player. Otherwise not really interested in PSU banks at the moment.

Where within power and its ancillary space, do you find value still?
There is a lot of action happening in

, and a few other stocks. These are typically value stocks that seem to shine in times like this. NTPC is a high debt company but in this environment, it’s competition will be raising prices at much higher rates than NTPC. Much about this sector is going to be about how much it is going to cost for you to build your capital expenditure both maintenance and new. NTPC itself is getting into a bunch of new areas including nuclear. So there is that as an additional advantage.
is kind of an ancillary but it works very well with the expansion in power generation that we are likely to see. There are private players. We own some of them including Power India, a few on the transmission line companies and perhaps even InvITs that do power transmission. The whole space is quite interesting.

Right now, the juicy ones are the public sector companies. The private sector companies have not yet come down to more juicy levels but whether there is a proper correction or an increase in earnings, these companies will become more affordable and we will be able to buy more of them. My allocation right now is much lower than I want it to be.


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