Bank stocks to consolidate till margins start improving, says InCred Equities; recommends HDFC, ICICI Bank, SBI
Banks Q3 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) earnings growth during the quarter ended December, led by 11% YoY Net Interest Income (NII) growth and around 45% YoY decline in provisions.
A compression in net interest margin (NIM) was seen across banks in Q3FY24. Loan growth is still showing stable trends at 15% YoY and credit costs are still running well below the long-term average, led by lower slippages.
Analysts expect the NIM compression to continue in the near term as deposit growth is still yet to catch up with loan growth.
InCred Equities expect liquidity to ease gradually, but a further rise in retail deposit rates is unlikely as banks will prefer wholesale deposits to manage their ALM.
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“Banks will choose better yield retail lending over tightly priced corporate loans to utilize the available liquidity at an optimum level. We believe RoA for private banks has peaked out, resulting in a consolidation phase for stock prices, which should stay till spread expansion materializes,” said InCred Equities analysts Jignesh Shial and Rishabh Jogani in a report.
The analysts believe 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 ratio (LCR).
“We believe the margin pressure for a couple of quarters is inevitable for all banks, until the policy easing cycle starts. Even after that, immediate relief is difficult, because the decline in lending rates would be faster compared to the repricing of deposit rates due to a higher share of variable-rate loans in the system,” the brokerage report said.
It also expects a limited improvement in credit costs from here on, as the best of the asset quality cycle is already behind.
“This will ensure a gradual decline in RoA for banks and would be weighing over their valuation premium. We should see a consolidation phase for stock prices in the banking sector till the margins start witnessing an improvement,” said the brokerage firm.
Also Read: Indian stock market: Why you should have SBI, HDFC Bank shares in your stock portfolio?
Bank stocks to buy:
Post-correction, InCred equities believes HDFC Bank trades at an attractive risk-reward ratio amid the growth granularity and pricing power. It believes the ICICI Bank lags in new customer acquisition compared to HDFC Bank.
We also like SBI because the diversity in its growth and improving retail franchise will command a valuation premium. Axis Bank struggles over creating a retail deposit franchise as well as building a secured lending portfolio. We have recently downgraded IndusInd Bank as we believe all the positives are already priced in and further upside remains capped, said InCred Equities.
Here are the ratings and target price for banks by InCred Equities:
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 views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.
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Published: 20 Feb 2024, 12:41 PM IST