While loan growth during Q2FY24 was comfortable at around 15% YoY for banks, net interest margin (NIM) declined for most led by re-pricing of cost of deposits and bank loans. Asset quality improved sequentially for public and private banks.

According to Kotak Institutional Equities, the healthy earnings growth of banks under its coverage was led by 17% YoY net interest income (NII) growth and 13% YoY operating profit growth. 

Analysts believe we are entering a period of low revenue growth for H2FY24 of banks as the cost of funds is yet to peak for all players.

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“Earnings growth is starting to slow as we are seeing reversals on NIM trends across most banks we cover. Loan growth is still showing stable trends (adjusted for HDFC Bank merger) at ~15% YoY. Credit cost is still running well below long-term average led by lower slippages. RoE is closer to long-term averages for all banks,” Kotak Institutional Equities said.

Total provisions of all banks under coverage during the quarter ended September 2023 declined 19% sequentially and 36% YoY. Asset quality for banks continued to improve. The proportion of delinquent loans on the balance sheet continued to decline. The stock of NPLs has been steadily coming down sequentially for PSU banks. Gross slippages for the sector remained under control and have shown a decline QoQ. 

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“Asset quality is unlikely to be a concern for most banks in the medium term, unless there is a sharp macroeconomic downturn—a relatively low-probability event in our view,” said the brokerage.

Meanwhile, a key challenge has been weak price performance by large banks, ignoring strong earnings trends. On the other hand, valuation premiums are shrinking between large and mid-private or public banks led by better asset quality and Small Finance Banks.

The brokerage believes we are entering a period of NIM contraction wherein large private banks like ICICI Bank and Axis Bank will not be well-placed in this leg of the cycle but expect public banks and HDFC Bank to be relatively well-positioned. 

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“We believe that despite the above concern on NIM trajectory, investors are probably better-off with large private banks over mid and small banks as the valuation premiums are far lower than what is comfortable. While we don’t see a risk of higher credit costs, we are likely to see similar outcomes on growth, return ratios, credit costs or asset quality metrics,” the brokerage firm said.

With headwinds of merger completed for HDFC Bank, it expects large banks to be in a favorable position to re-rate.

Among its top picks, Kotak Institutional Equities has ‘Buy’ ratings on State Bank of India (SBI) with a target price of ₹725 per share ; Axis Bank with a target price of ₹1,100 per share; HDFC Bank with a TP of ₹1,800 per share and ICICI Bank with a target of ₹1,150 per share.

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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Updated: 15 Nov 2023, 04:03 PM IST