Q3 Bank Results Review: The third quarter of FY24 was marked by continued moderation in revenue growth, while reasonable net profit growth for the banking sector amid benign credit costs.
The banks delivered 13% year-on-year (YoY) revenue growth during the quarter ended December, led by 11% YoY Net Interest Income (NII) growth and around 45% YoY decline in provisions.
Compression in net interest margin (NIM) was seen across banks in Q3FY24. Loan growth still shows stable trends at 15% YoY and credit costs continue to operate well below the long-term average, led by lower slippages.
Analysts expect the NIM compression to continue in the short term as deposit growth is yet to catch up with loan growth.
InCred Equities expects liquidity to decrease gradually, but a further increase in retail deposit rates is unlikely as banks will prefer wholesale deposits to manage their ALM.
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“Banks will choose better yielding retail lending over tight corporate loans to use the available liquidity at an optimal level. We believe that RoA for private banks has reached a peak, resulting in a consolidation phase for share prices, which should remain until the spread expansion is realized,” said InCred Equities analysts Jignesh Shial and Rishabh Jogani in a report.
The analysts believe that public sector banks (PSBs) are better placed on the liquidity front compared to private sector banks with their lower loan-to-deposit ratio (LDR) and higher liquidity coverage (LCR).
“We believe margin pressure for a few quarters is inevitable for all banks until the policy easing cycle kicks in. Even after that, immediate relief is difficult as the decline in loan balances would be faster compared to the repricing of deposit rates due to more high share of variable rate loans in the system,” the brokerage report said.
It also expects a limited improvement in credit costs from here, as the best of the asset quality cycle is already behind.
“This will ensure a gradual decline in RoA for banks and weigh on their valuation premium. We should see a consolidation phase for share prices in the banking sector until margins start to see an improvement,” said the brokerage firm.
Read also: Indian stock market: Why should you have shares of SBI, HDFC Bank in your stock portfolio?
Bank stocks to buy:
After correction, InCred shares believe that HDFC Bank trades with an attractive risk-reward between the growth granularity and pricing power. It believes that ICICI Bank is lagging behind in new customer acquisition compared to HDFC Bank.
We also like SBI because the diversity in its growth and improving retail franchise will command value. Axis Bank is struggling with creating a retail deposit franchise as well as building a secured lending portfolio. We recently downgraded IndusInd Bank as we believe all positives are already priced in and further upside remains limited, InCred Equities said.
Here are the ratings and target price for InCred Equities banks:
HDFC Bank | ADD | TP: ₹2,000
ICICI Bank | ADD | TP: ₹1,150
SBI | ADD | TP: ₹800
Axis Bank | HOLD | TP: ₹1,100
IndusInd Bank | HOLD | TP: ₹1,750
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Disclaimer: The opinions and recommendations made above are those of individual analysts or trading companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
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Published: 20 Feb 2024, 12:41 IST