Daily Voice | Material earnings upgrades unlikely for private as well as PSU banks in near term, says Shibani Kurian of Kotak AMC

“While we do expect earnings to remain fairly healthy in FY24, in the near term, we are unlikely to witness material earnings upgrades for banks, both private and PSU,” Shibani Sircar Kurian, Senior EVP & Head- Equity Research at Kotak Mahindra Asset Management Company says in an interview to Moneycontrol.

Further, she feels net interest margins for banks seem to have peaked in Q4FY23. “From here on, most banks could witness pressure on margins for the next few quarters as the cost of deposits moves upwards on account of re-pricing of the back book,” she says.

On the equity markets, Kurian, with more than 19 years of experience in the Indian equity markets, notes that equity markets have remained quite resilient on the back of three key factors falling into place a) improving macro variable and stronger relative growth b) strong earning delivery and c) positive flows from FIIs and DIIs.

Q: Do you think the additional re-rating or earnings upgrade for private sector banks is unlikely going ahead, but there will be a strong improvement in PSU banks?

The banking sector has been a key contributor to earnings growth in FY23 for the markets. While we do expect earnings to remain fairly healthy in FY24, in the near term, we are unlikely to witness material earnings upgrades for banks, both private and PSU. Loan growth in the system has been stronger than earlier anticipated and private banks are expected to grow faster than industry and hence the market share gains are likely to continue.

However, NIMs (net interest margins) for banks seem to have peaked in Q4FY23. From here on, most banks could witness pressure on margins for the next few quarters as the cost of deposits moves upwards on account of re-pricing of the back book. Asset quality has been holding up well and credit costs in the near term are likely to remain benign.

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PSU banks have seen a re-rating of multiples (P/BV – price-to-book value) in the past year. On the other hand, large private bank multiples have not expanded despite the fact that ROEs (return on equity) for most private banks have expanded in the last 3 years. Further, private banks are better capitalised. In terms of valuations, large private banks are trading at P/BV, which is lower than their long-term averages despite expansion in ROEs.

Q: Do you see a gradual recovery in rural demand continuing in the coming quarters?

Rural demand indicators appear to have bottomed out and should witness recovery but at a very gradual pace especially as we move into the festive season. The key factor to monitor would be the impact of the monsoons on agri income and the trajectory of inflation. Data on kharif sowing shows that at a headline level, sowing has been similar to levels seen last year.

Food inflation, which had witnessed a sharp spike, is now on a downward trajectory. Apart from agricultural income, rural India is also reliant on infrastructure activity to a large extent, which has seen quite a pickup and is likely to support rural demand.

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Q: What do you expect from the RBI governor’s commentary in the October policy meeting?

We expect RBI to keep policy rates on hold in the October policy meeting while keeping the stance of the monetary policy unchanged.

Q: Do you think the interest rate cut won’t happen till the first half of FY25?

The RBI would likely remain data dependent focusing on inflation. While food inflation is likely to moderate on the back of the softening of food prices, we expect the RBI to remain watchful of risks which include (1) crude oil price movement 2) monsoon uncertainties, and (3) action taken by global central banks.

While FY24 average CPI inflation would likely remain within RBI’s band of 4 percent (+/-2 percent), we expect the RBI to remain on hold for now, especially with the US Federal Reserve signalling policy rates could remain higher for longer.

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Q: Do you still see a possibility of a shallow recession in the US in the first half of the next calendar year?

While the data we monitor seems to suggest the possibility of a slowdown of growth in the US next year, most of the consensus GDP projections (including that of the US Fed) seem to suggest that growth in the US has been holding up better than expected and that recession is now largely off the table.

Q: Do you see a major concern for the equity markets, if the oil prices stay firm in the short term?

Indian equity markets have remained quite resilient on the back of three key factors falling into place a) improving macro variable and stronger relative growth b) strong earning delivery and c) positive flows from FIIs and DIIs. Corporate earnings estimates have been largely stable and holding on with mid-to-high teens earnings growth likely for FY24/FY25 for Nifty50 companies.

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Margin improvement is likely to be the key driver for earnings growth this fiscal. In that context, we would keep a close watch on the trajectory of crude oil prices and the impact on margins if prices stay at elevated levels for a prolonged period. Consumption demand has been skewed and the improvement in demand at the bottom of the pyramid is also a key factor to monitor.

Q: Are the mid and smallcap valuations appearing stretched relative to largecaps?

While the fundamentals of the market remain stable, valuations have moved up. Absolute valuations for the Nifty are above long-term averages. To that extent in the very short term, there is no room for disappointment and earnings delivery is crucial and therefore the markets could experience some volatility.

Further, while we are positive on mid- and small-cap opportunities in the medium to long term, at present, mid- and small-cap valuations appear stretched on an absolute basis and relative to large caps. Mid-cap index valuations are one Standard deviation higher than their 10-year mean and the mid-cap valuation premium over Nifty is significantly higher as compared to the average over the last 10 years. Similar trends are seen in the case of small-cap valuations. Hence, in the near term, our preference is marginally titled towards large caps over mid and small caps.

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