ICICI Bank, SBI, IndusInd Bank: Why is Jefferies bullish on these lenders

ICICI Bank, State Bank of India (SBI) and IndusInd Bank are top picks of Jefferies as it sees concern on deposit growth ot ease and sweet spot-on credit costs may stay. It expects a rate hike of 25-50 basis points, which may drop in H2CY23.

The brokerage has said the valuations gap between public and private lenders is narrowing, with flagging a few points of caution including Reliance's entry and elections in next 12-18 months.

Nifty Bank jumped 21 per cent in the 2022, outperforming the domestic benchmark indices and global peers. Despite this the valuations are near average and health profit growth with rise in return on equity (ROE) in 2023 is seen, said Jefferies.

In 2022, bank credit growth improved from 8 per cent to 17 per cent, and in 2023, it expects bank credit growth to normalize these levels after moderation in wholesale inflation. "PSU banks' participation will keep banks' growth healthy," it said.

In 2022, banks' deposit growth of 10 per cent lagged credit growth leading to tight liquidity and rise in rates, which can improve a bit to 11-12 per cent, rates will stay elevated, and RBI may need to intervene, it said. "Public Sector Banks (PSBs) with low loan-to-deposit ratio (LDR), ICICI Bank and Kotak Mahindra Bank are better placed."

Retail borrower behavior and corporate cash-flows are the best in many years and the trend is likely to continue, said the global brokerage. "Credit costs should stay benign in FY24-25."

Jefferies see limited risk to earnings, as banks may pull-back some expenditure and consensus estimates don't build in peak NIMs in FY24E. Banks may selectively consider capital raise in 2H23, it said.

PSU banks are bridging gap with private banks on growth and Return on Assets (RoA), it said. "Their loan growth at 15 per cent, narrowly below private banks compared to pre-Covid average. "ROA gap has also narrowed and PSB valuations is up 70 per cent discount compared to private ones, which can narrow further," it said.

However, as a word of caution, the brokerage said to watch out for Reliance Group's plans to foray into financial services business. "The progress so far is limited but it can impact weaker players and drive M&A," it said.

The brokerage has also warned to watch out loan waivers, rural schemes, privatization of the state-run lenders, hike in ownership limit for private banks amid the 2023 state election in nine states and 2024 being the year for general elections.

Jefferies as a buy rating on Axis Bank, Bandhan Bank, IndusInd Bank, ICICI Bank Kotak Mahindra Bank among the private sector lenders. It likes State Bank of India among the PSU lenders, whereas Punjab National Bank has 'underperform' tag.

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