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Banks Q3 Results Review: Q3FY24 was marked by continued moderation in revenue growth while reasonable net profit growth for the banking sector amid benign credit costs.
Banks achieved 13% year-on-year profit growth during the quarter ended December, led by 11% year-on-year growth in net interest income (NII) and around 45% year-on-year decline in provisions.
Compression in net interest margin (NIM) was observed across all banks in Q3FY24. Loan growth continues to show stable trends of 15% YoY and credit costs remain well below average in the long term, led by minor deviations.
Analysts expect NIM compression to continue in the near term as deposit growth has yet to catch up with loan growth.
InCred Equities expects liquidity to gradually decline, but a further rise in retail deposit rates is unlikely as banks will prefer wholesale deposits to manage their ALM.
Also read: Stocks to buy: NCC and Talbros Automotive among HDFC Securities’ top three top stock picks
“Banks will opt for better-performing retail loans rather than tightly priced corporate loans to utilize the available liquidity at an optimal level. “We believe that private banks’ ROA has peaked, leading to a consolidation phase in share prices, which should continue until spread expansion materializes,” InCred analysts said. Equities Jignesh Shial and Rishabh Jogani in a report.
Analysts believe that public sector banks (PSBs) are better positioned on the liquidity front compared to private sector banks with their lower loan-deposit ratio (LDR) and higher liquidity coverage ratio (LCR).
“We believe pressure on margins for a couple of quarters is inevitable for all banks, until the policy easing cycle begins. Even after that, immediate relief is difficult, because the fall in loan interest rates would be faster compared to the revaluation of deposit rates due to a higher proportion of floating rate loans in the system,” the brokerage report says.
It also expects limited improvement in credit costs from now on as the best of the asset quality cycle is behind us.
“This will ensure a gradual decline in the RoA of banks and would affect their valuation premium. “We should see a consolidation phase of share prices in the banking sector until margins start improving,” the brokerage firm said.
Also read: Indian Stock Market: Why should you have SBI and HDFC Bank shares in your stock portfolio?
Bank stocks to buy:
Post correction, InCred Equities believes HDFC Bank is trading at an attractive risk-reward ratio amid growth granularity and pricing power. He believes ICICI Bank is lagging behind in acquiring new customers compared to HDFC Bank.
We also like SBI because diversity in its growth and improving retail franchise will drive a valuation premium. Axis Bank is striving to create a retail deposit franchise as well as create a secured loan portfolio. “We have recently downgraded IndusInd Bank as we believe all the positives are already priced in and further upside remains limited,” InCred Equities said.
Here are InCred Equities’ bank ratings and price target:
HDFC Bank | ADD | TP: $2,000
ICICI Bank | ADD | TP: $1,150
SBI | ADD | TP: $800
banking axis | KEEP | TP: $1,100
Industrial Bank | KEEP | TP: $1,750
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Disclaimer: The opinions and recommendations above are those of individual analysts or brokerage firms, and not those of Mint. We advise investors to consult certified experts before making any investment decisions.
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