While banks’ earnings growth is slowing due to margin pressure and higher operating expenses, it remains healthy thanks to strong loan growth and asset quality.
According to Rahul Malani, a research analyst at Sharekhan of BNP Paribas, tight liquidity conditions create a challenge for the banks to mobilize deposits. Additionally, a higher credit-deposit ratio also creates a challenge to sustain loan growth at healthy levels.
However, most negatives could be priced in for the banking stocks.
There is no demand-side limit for the loan growth. Thus, the focus is more on deposit growth as it would have an impact on loan growth and NIMs (net interest margins) in the coming quarter, observed Malani.
In particular, the outlook for banks’ asset quality remains stable despite concerns raised about the unsecured segment.
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Malani believes that banks’ return ratios are unlikely to reverse significantly in the near to medium term.
Malani expects a gradual normalization of credit cost but its impact could be manageable unless there is a sharp macroeconomic downturn. Moreover, additional contingency reserve buffers, higher PCR, higher capital buffers and lower stressed assets bode well for the outlook of the banking sector.
“Valuations are reasonable against the sustainable RoE (return on equity) trajectory above nearly 15 percent in the near to medium term. Favorite picks are ICICI Bank and Axis Bank among large private banks and IndusInd Bank and Federal Bank among mid-tier private banks. Within public sector banks, SBI, Bank of India and PNB remain our favorite choices,” Malani said.
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Here are four large-cap bank stocks that several analysts recommend buying. Check out:
Jignesh Shial, Director – Research, Head of BFSI Sector at InCred Capital
HDFC Bank corrected sharply nearly 17 percent in 2024 on looming concerns of further NIM pressure due to the upcoming refinancing of HDFC Ltd.’s loans.
However, we believe that elevated cost of deposits and NIM pressure would be a common problem for all banks in the near term and that HDFC Bank is better placed due to its improved penetration providing portfolio granularity and command over loan pricing.
It is available at nearly 1.9 times FY25F BV (book value) (almost a 30 percent discount to its long-term average) on its own, which provides an attractive risk-reward ratio.
HDFC Bank is our high-conviction “add” stock with a target price of ₹2,000, valuing the standalone bank at nearly 2.7 times FY25F BV and its subsidiaries at ₹200.
Slow growth and weak margins are key downside risks.
Santosh Meena, Head of Research, Swastika Investmart
State Bank of India (SBI) is a key indicator of India’s economic health and infrastructure investment.
The bank boasts impressive loan growth while maintaining stable asset quality.
Despite recent gains, its valuation remains attractive, trading below twice the price-to-book value ratio, which is lower than many other banks.
Considering historical trends, SBI witnessed a remarkable increase from 30 to 300 during the 2003-2007 bull market phase, after a decade of consolidation.
Similarly, after a decade of consolidation, the recent break above the 300 level in 2021 suggests the potential for a major upward movement similar to the 2003-2007 period.
At its peak valuation in the previous bull, SBI traded at a price-to-book value ratio of 3.5, indicating that there is still considerable upside potential.
The immediate goal is ₹880 while the one year target is at ₹1,100 with a stop loss of ₹700
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Vijay Gour, Analyst – BFSI, Choice Broking
IndusInd Bank is expected to report strong credit and deposit growth in FY24 and FY25, while net interest margin (NIM) would remain slightly higher than FY23 levels.
Gross NPA is expected to come down from 2 percent in FY23 to 1.8 percent in FY24.
In terms of return ratios, RoE (return on equity) and RoA (return on assets) are expected to remain healthy at 15.6 percent and 1.8 percent, respectively, for FY24 and 16.8 percent and 2 percent, respectively, for FY25. .
ICICI Bank is likely to record strong credit growth in FY24 and FY25, while deposit growth would match credit growth.
Asset quality has improved significantly in the last two years. An improvement in asset quality would lead to lower credit costs going forward.
Return ratios (RoE and RoA) are expected to improve from FY23 levels for the bank.
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Disclaimer: The views and recommendations above are those of individual analysts, experts and second-hand companies, not of Mint. We advise investors to check with certified experts before making any investment decisions.
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Published: 07 Mar 2024, 12:58 IST