Nomura India in its latest results preview note said it prefers banks such as ICICI Bank Ltd, State Bank of India, Kotak Mahindra Bank Ltd (KMB) and Federal Bank going into June quarter earnings season. The foreign brokerage finds risk-reward unfavorable for private lenders such as HDFC Bank Ltd, IndusInd Bank Ltd, AU SFB and Bandhan Bank Ltd. YES Bank could be the only lender in Nomura's banking universe, which may report a de-growth in profit after tax. (See table below)
The foreign brokerage said it is liking stocks that offer higher 'value' adjusting for loan growth and return on equity. It believes the Loan-to-Deposit Ratio (LDR) led loan growth disparities on banks’ loan growth profile could become more pronounced in the June quarter results.
System loan growth continued to track at a strong 16 per cent YoY (as of June 14 ) but the deposit growth trends remained relatively muted (12 per cent YoY), and this was visible in banks’ provisional Q1 business updates. Nomura India noted that the loan-to-deposit ratio for the system at 80 per cent is at decade highs with the RBI repeatedly flagging concerns about the gap between system loan and deposit growth.
"LCR and LDR will remain system-level loan growth constraints in FY25, in our view, and we have a clear preference for the more liquid banks (i.e., with lower LDR). On the profitability front, we expect RoA normalisation to continue, along expected lines, led by continued q-q NIM moderation. We believe NIMs of large banks should witness continued gradual compression in 1Q led by moderation in CASA ratios and re-pricing of term deposits. Asset quality trends should remain benign, though we expect a gradual inching up of credit costs, led by a weakening pace of NPL recoveries," it said.
The domestic brokerage believes ICICI Bank and Kotak Mahindra Bank stand out as the only ones that can comfortably report over 16 per cent YoY loan growth in the June quarter. Among mid-sized private banks, Federal Bank's performance clearly stands out as per its pre-1Q update, with strong delivery on loans and deposits, the brokerage said.
"These private banks (ICICI, KMB, FB) also happen to be the ones with the lowest loan-to-deposit ratios in our coverage, and all of them feature in our top picks. On the other hand, banks with relatively higher LDRs like HDFCB and IIB (both rated Neutral), have seen softer loan growth trends as per their pre-1Q updates, while Axis Bank may also see relatively softer loan growth. Among PSUs, we expect loan growth for SBI to remain strong (16 per cent YoY in Q1FY25), and it remains among our preferred picks," Nomura said.