Private lenders such as HDFC Bank Ltd, ICICI Bank Ltd, Axis Bank and IndusInd Bank are offering better risk reward now following the recent run-up in PSU bank stocks. PSBs may take a halt, before initiating the next leg of upmove, analysts said in their December quarter reviews.
ICICI Securities said that even as it factors in moderation in YoY net interest margin (NIM) for private banks, it sees strong return on asset and return on equity /RoE for FY25/26. It said the prevailing valuations suggest almost nil ‘growth multiple’ for private banks, and thus, risk rewards are attractive.
Adani Rathi said large cap private banks have a better risk-reward than others in the BFSI space, as the government loosens its purse strings, improving the banking liquidity coupled with the robust underlying credit demand. Its top picks included ICICI Bank and Axis Bank. Among PSU bank, it prefers State Bank of India and Bank of Baroda (BOB).
Emkay Global said it has turned cautious on retail-heavy private sector banks amid rising asset-quality risk in the unsecured retail loan segment, even as it do not expect a complete blow-out, as the stress is still mainly in the low-ticket segment. It noted that large banks have built strong specific PCR plus contingent buffers to absorb initial stress without impacting profitability.
"Thus, we prefer ICICI Bank, IndusInd Bank, HDFC Bank, and Axis Bank among large PVBs. Of the mid-size PVBs, we continue to prefer Karur Vyvsa Bank, given its strong & consistent performance, while we have recently lowered our rating for IDFC Bank/AU SFB," Emkay said.
Emkay said despite the higher impact of wage revision and higher retirement liability in Q3, and potentially in Q3 as well, we believe PSBs will report limited margin contraction in FY25, given their still lower LDR/higher MCLR.
"Additionally, change in investment guidelines from 1-Apr-24 would take out risk of MTM loss via P&L, while softening G-Sec yields—leading to healthy treasury gains and lower staff cost with wage revision impact being behind—should help these banks report higher RoAs (1-1.2 per cent)/RoE of 16-20 per cent over FY25-26. Post the recent sharp run-up, valuations have stretched a bit for PSBs and could, thus, take a pause before re-rating further," it said.
Motilal Oswal said banking sector earnings may continue to remain resilient, led by healthy loan growth and controlled provisions. It however cut our earnings estimates for private banks due to higher cost pressures, concerns over loan growth given stretched LDR, and rising CoF impacting margins.
With the industry CD ratio at its peak, competition for deposits is heating up and it remained watchful on CoF and, therefore, sees NIM moderation.
'We believe banks with a higher CASA mix are well positioned to navigate the rising rate environment, even as the CoF is likely to increase. The asset quality outlook remains encouraging, with anticipation of a moderation in slippages, healthy PCR, and contingent buffers driving benign trends in core credit costs. The turn in the delinquency cycle in unsecured loans keeps us watchful, but we expect credit costs to stay under control over the coming quarters.
Among private banks, it prefer ICICI Bank and IndusInd Bank. Among PSUs, Motilal Oswal likes SBI, Canara Bank and Union Bank.
Kotak Institutional Equities noted that while frontline private banks continued on a robust growth trajectory, even the large PSU banks showed very healthy growth in the December quarter. At the same time, some regional private banks also showed meaningful recovery in credit growth, indicating a change in the stance from asset quality management toward growth.
Segmental credit growth data reported by individual banks indicated that credit growth has been relatively more broadbased across sectors of retail, MSME and large corporate, but has been led by retail.
"We expect retail and MSME to continue to drive growth as well. In the case of some PSU banks, the international loan book saw robust growth in FY2023, but that growth is also cooling off," it said.
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