The Nifty Private Bank index has lost over half a percent in 2024 YTD against a massive over 15 percent gain in the Nifty PSU Bank index. In comparison, the benchmark Nifty Bank lost around 4 percent mainly dragged down by heavyweight private banks. Experts also believe that PSU banks are better placed than private banks at present and that private banks are likely to see more consolidation in the near future.
“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 in a report.
In the middle of this environment, brokers have suggested 3 private sector banks that you can buy with up to 47 percent potential. Let’s take a look.
Centrum Broking on RBL Bank: The brokerage has a ‘buy’ call on the stock with a target price of ₹331, indicating 47 percent potential.
According to the brokerage, RBL Bank is emerging from a de-risking phase that resulted in stagnant growth from FY20 to FY23, with advances showing a compound annual growth rate (CAGR) of 6.6%. However, in FY23 and 1QFY24, the bank showed a remarkable turnaround, achieving 17% and 21% year-on-year growth, respectively. This change is attributed to the trading of both assets and liabilities. On the asset side, RBL expanded its retail product offerings, leading to robust growth in its retail portfolio, which now accounts for 55% of advances, with year-on-year growth of 21% in FY23 and 34% in 1QFY24.
The bank has also improved its asset quality, with gross non-performing assets (GNPA) and net non-performing assets (NNPA) ratios declining to 3.2% and 1.0%, respectively, as of 1QFY24. Overall, RBL Bank has effectively addressed investor concerns about corporate governance, liability franchise and growth prospects, positioning itself for future growth and stability, it said.
“In terms of growth, we see clarity emerging on most fronts for RBL as well as scope for positive surprises going forward. We are baking in strong numbers in advances, NII, and PAT, with CAGR of 23%, 26%, and 36.%, respectively over FY23-26E We believe RBL is well positioned to deliver average RoAA and RoAE of 1.1% and 12% over FY24-26E Current valuations (0.8x PB, 7x PE – 1HFY26) offer ample margin of safety. . Importantly, the long cycle of declining EPS (which started in FY20) is finally coming to an end in our view. Looking forward to FY24-26E, RBL is likely to see the best earnings momentum in the sector with a 36% EPS CAGR,” the brokerage explained. .
BP Wealth on IndusInd Bank: The brokerage has a ‘buy’ call on the private sector lender with a target price of ₹1,950, which implies an increase of 32 percent with a 12-month investment horizon.
According to the brokerage, IndusInd Bank, with its large portion of high-yield and fixed-rate holdings, will reap major benefits as the interest rate cycle is expected to kick in, likely in the second half of FY25. This strategic position positions IndusInd Bank as an attractive investment opportunity for those seeking exposure to India’s robust economic expansion. Notably, the expressed intention of the bank’s promoters to raise their stake from 15% to 26%, pending RBI approval, provides considerable reassurance to investors, it added.
The brokerage further pointed out that it is currently trading at an attractive valuation of 1.4 times the estimated FY26 book value of Rs. 1,080 and a P/E ratio of just 9.1 times the estimated FY26 EPS of Rs. 170, with an impressive earnings compound annual growth rate (CAGR) of 21%, IndusInd Bank offers compelling investment potential. The resulting PEG ratio of 0.4 times, coupled with the expected increase in return on assets (ROA) to 2% by FY26, further enhances its attractiveness relative to peers. Additionally, with a projected return on equity (ROE) of 17% while maintaining a modest price to book value of 1.4 times, IndusInd Bank stands out among its peers. Additionally, management’s indication of potential Opex-led ROA as operating scale increases and technology investments grow more slowly adds to the bank’s appeal, BP added.
BOBCAPS Research on IDFC First Bank: The brokerage has a ‘buy’ call on the lender with a target price of ₹96, which means an increase of more than 22 percent. Better operating efficiencies would be key to improving ROA/ROE (1.4%/14% in FY26E). “Given sustainable growth and stable asset quality, we assume coverage with BUY,” the brokerage said.
Since it merged with IDFC, IDFCFirst Bank has delivered strong business growth (moving from institutional lending to retail) with a focus on reducing high-cost funds to improve margins. Baking in IDFCBK’s track record and industry dynamics, the brokerage assumes a credit/deposit CAGR of 24%/31% over FY23-FY26. It expects strategic growth in the loan book to be driven by the SME and retail portfolio, likely helping NIM. Along with strong deposit growth, IDFCBK has a healthy CASA ratio of 47% in Q3FY24 (the highest among peers), which also supports NIM, the brokerage added. It also estimates that IDFC First Bank’s asset quality will remain stable with a GNPA/NNPA of 2.1%/0.7% over FY26 with a PCR of 69%.
“IDFC First Bank is a turnaround story post-Covid-19, with its business dynamics and asset quality improving greatly, as partially reflected in the rating re-rating over the past year. Thus, given strong business growth, stable margins and healthy asset quality. , we believe the bank has further scope to improve its return metrics. We believe the bank’s strategic approach to becoming IDFC 2.0 bodes well for it, although improving operational efficiencies would be key,” the brokerage said.
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: 15 Mar 2024, 13:40 IST