The March quarter results are likely to be strong for banks, said Emkay Global, which remained constructive on the sector, even as it expects some moderation in credit growth going post fourth quarter. The brokerage prefers ICICI Bank, Axis Bank, Bank of Baroda (BOB), SBI, Federal Bank, Karur Vysya Bank (KVB) and Indian Bank among banking stocks. HDFC Bank, it said, too offers a good defensive bet, Emkay Global said staying concerned about Kotak Mahindra Bank’s top management change in the ensuing year.
“With its current MD & CEO’s term extended by 2 years, we believe IndusInd Bank’s stock performance will track its financial performance, which is expected to improve led by better growth and improving asset quality. RBL Bank and Bandhan Bank, too, are expected to log a better 4Q vs 3Q, and could see interest from Alpha-seeking investors,” it said.
Emkay Global said domestic banks have their balance sheet funded mainly with granular retail deposits (unlike global banks), have better asset liability management (ALM) and are under continuous monitoring/have support from stringent regulator like the RBI, thus reducing the risk of any sudden liquidity crisis, as seen in US-based SVB.
The RBI, it said, has a good record of proactively managing bank failures in India.
In terms of the investment book, too, majority of the Indian banks’ investments are classified as HTM (no requirement to make MTM losses), while such HTM securities too are predominantly in high-quality G-Secs with limited or no risk, Emkay Global said.
“The AFS portfolio of banks, on which MTM losses are booked every quarter, is only 15-40 per cent of the total investment book, with the duration of this portfolio now down to 2 years for most banks. PSBs have a relatively higher share of the AFS portfolio vs PVBs; however, we believe the incremental MTM losses on this portfolio shall be limited, as the 10-year G-Sec yield has been largely stable,” Emkay Global said.
The domestic brokerage said AT1 bonds issuance by Indian banks has been relatively lower, with a few players like Canara Bank, BoB, PNB, SBI and HDFC Bank holding AT1 to the tune of 1-2 per cent of RWA, while small banks are largely non-existent in AT1 markets.
“Our discussion with bankers suggest that counter-party risk from US/Europe bank failures or AT1 w-offs remains lower for the Indian banking system, but could lead to increase in risk premia on bonds and thus borrowing rates,” it said.
Emkay Global said Indian banks remain resilient amid the global banking crisis and that the recent correction provides a good entry point.
“The recent global financial crisis extended the correction in the banking stocks earlier, owing to the Adani saga. However, we believe Indian banks remain resilient in terms of liquidity, investment book, growth and asset quality compared with their global counterparts. We expect credit growth to moderate a bit, amid rising rates, but stay reasonably healthy; this, coupled with improving asset quality and receding provisions, should support the earnings momentum,” it said.
That said, banks may report mixed margins in March quarter, with some banks having higher share of the MCLR book seeing margin uptick, while others reporting likely flat-to-lower margin QoQ, on rising funding cost, analysts said.
Data showed credit growth stood at 15.7 per cent YoY for the fortnight ended March 10 against 15.5 per cent for the prior fortnight, fueled by broad-based retail growth as well as back-ended support from the corporate book. Emkay Global sees some moderation posr Q4, amid a rising rate scenario.
Deposit growth has picked up from the November 2022 lows, albeit remaining a laggard, at 10.3 per cent YoY. Emkay said lower deposit growth is a lingering concern for the sector, with the onset of the busy Q4 season and with past liquidity largely consumed by banks.
“We expect the war for deposits to intensify, separating the boys from the men, as banks that have built a strong liability franchisee over the years will gain low-cost deposit market share. We expect margin performance to be mixed in w3ith some banks having higher share of the MCLR book seeing margin uptick, while others reporting likely flat-to-lower margin QoQ, on rising funding cost,” it said.
The brokerage said the recent government decision to take away indexation benefit from Debt MF will not materially reduce competition, given lower retail participation.
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