The banking space has been in focus on the back of the recent earnings season as well as the continuing global financial crisis. In a recent note, brokerage house LKP Securities said that Indian Bank’s balance sheets are much more resilient than they were historically in terms of capital buffer, credit quality, and liquidity, aided by stringent regulatory frameworks.
Going ahead, it expects Global Banking Crisis to have no significant impact on the Indian Banking system. Nevertheless, the key investment theme for FY24E will be core earnings performance rather than the parameters of asset quality and capital sufficiency, LKP added.
Amid this backdrop, the brokerage has bet on 5 lenders - ICICI Bank, Axis Bank, SBI, and Bank of Baroda among large banks and CSB Bank among small banks. We are bullish on CSB considering high capital, growth trajectory and low-stress formation, it said.
Why LKP is bullish on banks?
Earnings Potential: As per the brokerage, the operating environment of Indian Banks is likely to stay healthy for FY24E, which may translate into stable ROA despite moderation in credit growth and margin compression. It expects the credit growth for FY24E to come down and also sees NIMs reducing because of the rising cost of deposits. Nevertheless, ROA is likely to stay stable considering lower credit cost which may counterweight the negative impact of NIMs compression, it forecasted.
LKP further pointed out that since May-2022, despite several rate hikes, we have witnessed strong credit demand because of higher capex, robust working capital needs and growth in unsecured pockets.
For Private Sector Banks, (PVB) LKP expects a loan growth of more than 16 percent led by HDFC Bank, ICICI Bank, Kotak Mahindra Bank and Axis Bank. The large PVBs may try finding retail pockets to grow while PSBs’ growth may stay below the sector average as they have large exposure to corporate credit, it added.
It further said that SBI and BOB are expected to lead PSBs due to their digital initiatives, market penetration and lesser impact on account of the Expected Credit Loss guidelines compared to other state-run peers of similar size. Among smaller banks, CSB is likely to outperform its peers factoring in higher growth capital and ample liquidity, noted LKP.
Asset Quality Metrics: The brokerage stated that the lower stress formation provides the biggest comfort to the banking system. The NPA levels are at a decade low and it estimates further reduction going forward. It further believes that the stress formation in retail loans is low and that the granularity and superior underwriting have kept the retail NPA under control.
Liquidity Risk: As per the brokerage, the Indian banking system is majorly resilient against the liquidity crisis, unlike a few regional banks in the USA. The prudent regulatory measures, adequate liquidity buffers, sufficient CRAR, and granular retail deposits play an important role to handle liquidity shocks, if any, it noted. All the banks are operating above the regulatory LCR levels and have adequate capital to absorb liquidity jolts, therefore, it believes, the liquidity risk has no significant part to play under such a robust regulatory framework.
Stocks:
ICICI Bank: The brokerage has a buy call on the lender with a target of ₹1,156, indicating an upside of 24 percent. Going ahead, LKP expects ICICI's loan book to grow at a CAGR of 20 percent over FY23-26E, led by technology initiatives. The credit cost normalization is underway. It estimates a return ratio ROA/ROE of 2.1 percent and 16.6 percent in FY24E.
Axis Bank: The brokerage has a buy call on the stock with a target price of ₹1,032, indicating an upside of 17 percent. Going ahead, LKP expects a thinner margin squeeze, however, the ROE is likely to be around 16 percent for FY24 driven by lower credit costs. The deposit growth will be keenly watched in this competitive environment. The CDR level is well maintained and it expects strong business growth led by retail book.
The brokerage also likes SBI, BoB and CSB Bank.
