Foreign brokerage Nomura India has added Kotak Mahindra Bank Ltd among its top banking picks, as it excluded Axis Bank Ltd from the list. ICICI Bank, State Bank of India and Kotak Mahindra Bank are among its top large banks now while it prefers Federal Bank among mid-sized banks, all rated 'Buy'.
Against 14 per cent and 16 per cent YoY growth in bank commercial credit over FY23 and FY24, system deposit growth has lagged at 9 per cent YoY and 12 per cent YoY respectively, putting pressure on system liquidity.
"Credit creates deposits and over a longer-term timeframe, both deposit growth and credit growth tend to be roughly equal; hence, this persistent divergence has been concerning. Our analysis suggests that the key drag on deposit creation in FY24 arose from: a) lower net credit to the government from the banking system, and b) higher net non-monetary liabilities of banks," Nomura India said.
In FY25, Nomura said deposit positives due to flows from the JP Morgan bond index inclusion could be offset by a ‘normal’ pick-up in currency in circulation in the system. This was not seen in FY24 due to the Rs 2,000 note withdrawal by the RBI.
Nomura said any sustainable pick-up in deposit growth (above its base case of 13 per cent YoY for FY25) will, require substantial increase in bank credit to the government or forex assets purchases by the RBI.
"In the absence of these, we think liquidity coverage ratio (LCR) and loan-to-deposit ratio (LDR) should continue to be system loan growth constraints. We continue to have a ‘value’-focused approach amid the broader convergence in RoEs across the sector, with a preference for more liquid banks," it said.
The foreign brokerage has a target price of Rs 1,250 on Axis Bank, Rs 195 on Federal Bank, Rs 1,335 on ICICI Bank, Rs 2,000 on Kotak Mahindra Bank and Rs 1,000 on State Bank of India.
Nomura said while banks can create deposits by extending commercial credit, this is incrementally LCR-negative, given commercial credit does not qualify as a high quality liquid asset (HQLA). Hence, for banks with lower LCR (and generally higher LDRs), this does create a constraint on loan growth.
"PSU banks still have higher LCRs vs private banks, although this has come down significantly over the past two quarters. We believe some of the large private banks with higher LDRs (e.g. HDFC Bank, Axis Bank and IndusInd Bank) may see a moderation in loan growth, and we reduce our loan growth estimates for these over the past two quarters," it said.