HDFC Bank, ICICI Bank, Axis Bank, IndusInd Bank: CLSA prefers largecap banking shares; here's why

Foreign brokerage CLSA said the outperformance of smallcap and midcap indices at 32-38 per cent over Nifty in 2023 is close to record levels and that further outperformance may not be easy. CLSA said it is especially true for smallcap and largecap banks, as the valuation premium of small and mid cap (SMID) banks to big banks hit 8-10-year highs.

Banks remains the biggest overweight in CLSA’s India focus portfolio, which includes HDFC Bank Ltd, ICICI Bank Ltd, Axis Bank Ltd and IndusInd Bank, the brokerage said.

"FII and DMF overweight of banks is also near record lows, while our growth and valuation analysis finds banks as most attractive within the Nifty. Banks remains the biggest overweight in CLSA’s India focus portfolio," CLSA said. DMF stands for domestic mutual funds.

CLSA said while the popular perception is that financials have underperformed, a detailed look shows that this is anything but a secular trend. "Although two-thirds of lending NBFCs have underperformed, vehicle and power finance stocks have done well. The most conflicting trend is in banks. While 45 per cent of bank stocks have outperformed their respective Mcap, this varies materially, with 17 per cent of banks in the Nifty outperforming but a much bigger 60 per cent of small-cap banks beating their respective benchmark. About 36 per cent of midcap banks and 75 per cent of large-cap banks outside the Nifty have beaten their Mcap category," CLSA said.

The broking firm noted that PSU bank index have outperformed the private bank index by 12.3 percentage points in 2023 so far.

"On an overall basis, banks are trading below their long-term average valuations. At the same time, this relative valuation versus the Nifty is at an attractive -1 standard deviation of their historical average levels," CLSA said.

Within the overall banks space, CLSA said, the divergent performance has notably increased the relative valuation attractiveness of the larger banks in the Nifty.

"On a PB basis, the premium of midcap banks vs bank stocks in the Nifty has risen to a 12-year high and has crossed above 1 standard deviation of the longer-term 15-year average. On similar lines, the PB premium of small-cap banks vs banks in the Nifty is near eight-year highs,” it said.

CLSA said a more stable return on equity profile as well as steady earnings growth for big-cap Nifty banks should further cement their relative attractiveness within the banking space.

"Our cross-section of two-year earnings growth (FY24-26) and valuation premium versus the 10-year average for Nifty stocks also finds most large-cap banks favourably placed in the high growth-low premium GARP quadrant amongst Nifty stocks," CLSA said.

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