Foreign brokerage CLSA said strong balance sheets, record profits and inexpensive valuations should help laggard private sector banks deliver better returns going ahead. it said key short-term for banks is a sharp repo rate cut that would reverse the NIM improvement banks have delivered adding it likes large banks and has preference for ICICI Bank Ltd and IndusInd Bank.
"We believe Indian banks are well placed after a rollercoaster decade. Balance sheets are the strongest they have been in over a decade and profits have rebounded sharply (quadrupling in 10 years). Sector ROE is at its highest since FY11. Loan growth has picked up from an average of 10 per cent over FY12-22 to 15 per cent over the past two years and deposit growth should follow. Against this backdrop, PSU Banks outperformed private sector banks by 80 ppts/100 ppt in the past 1-year/5-year from a low base," the foreign brokerage said.
CLSA said private sector banks, which have been stock market laggards, should now give better returns given a good business outlook and inexpensive valuations -- 10-15 times PE against Nifty's 18 times.
CLSA said the banking sector loan growth has picked up from a decadal average of 10 per cent to 15 per cent over the past two years driven by all sub-segments and possibly some shift from corporate bond substitution.
"While we expect a degree of normalisation in unsecured loan growth from 20 per cent-plus to mid-to-high teens, we estimate overall loan growth at 14-15 per cent over the next two years. We expect private sector banks to continue gaining market share. However, FY25 loan growth across our coverage banks is likely to be divergent due to idiosyncratic issues," CLSA said.
CLSA said the net NPL/net worth ratio of the banking sector has declined to decadal lows, driven by better asset quality, stronger provision buffers and an improved capital position. PAT for the sector has rebounded sharply and has quadrupled over the past decade. Banking sector ROE of 15 per cent is the highest since FY11. In this context, PSU banks have re-rated sharply from a low base, while private sector banks have been laggards. "We expect the underperformance of the latter to reverse," it said.
Over long time-periods, loan growth and deposit growth have been in sync. In the past two years, lower deposit growth could be attributed to lower reserve money growth, which CLSA’s India economist expects will pick up.
"One notable trend over the past decade is that private sector banks have outpaced PSU Banks in current account (CA) deposits by a margin and have also pared down non-deposit borrowings. This gives them a funding cost similar/marginally better than that of PSU Banks, making them competitive on the loan side," CLSA said.