Counters on Banking Stocks are getting hot, here are top picks

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Banking stocks are favoured by analysts owing to the prospects of better spending. Around a festive season, consumers may shop through their credit cards, seek loans, apply for housing and even personal loans. Prospects of a better business and service sector growth as evidenced by recent PMI data on services sector growing to a 8 month high are reasons for the sudden rush to banking stocks.  

There is also consensus that the October-December quarter could see brisk business as opposed to a slump during two quarters ago. In a sector trend report, analysts at HDFC Securities point out economic factors such as stagnation of industrial credit growth, service sector, the prospects of the personal loan segment and even agricultural credit growth.  

Industrial credit growth continued to trend downwards with nil growth in September. This trend was led by a reduction in large industrial credit, which de-grew 0.6% YoY (a 39 month low, -1% MoM). Credit to micro and small industries was flattish YoY. Spurred by disbursals under the MSME credit guarantee scheme, credit to medium industries reached a 103-month high at 14.5%, with record-breaking MoM growth (11.9%). Within industrial credit, sectors such as gems and jewellery, glass and glassware and all engineering including electronics saw persistent YoY de-growth. Credit for vehicle, vehicle parts and transport equipment and construction saw accelerating growth. Infrastructure continued to remain muted at 1.1% YoY. Within this segment, credit to the power sector de-grew 0.9% YoY. After rapid growth between February 2019 and June 2020, credit to the telecom segment de-grew by 0.2% YoY.

Service sector credit growth accelerated to 9.1% YoY, after slowing between May and August. Within this segment, growth in credit to NBFCs (+12.5% YoY, lowest in the last 35 quarters), and CRE (+5.5% YoY, lowest in the last 21 quarters) continued to slow. Overall trade credit growth remained healthy at 11.5% YoY. Wholesale trade credit growth continued to accelerate, reaching 21.2% YoY (highest level since March) even as retail trade credit growth slowed to 4.2% YoY.

Personal loan segment saw most dramatic decline in growth owing to pandemic. Growth in this segment slowed to the 9.2% YoY, the lowest in the last 120 months. This was led by a slowdown in home loan growth to 8.5% YoY, the lowest in the last 125 months. Growth in credit card debt was uninspiring at just 6.3% YoY, albeit higher than the low of -0.8% seen in May. Vehicle loan growth continued to accelerate gradually, reaching 8.8% YoY.

Agricultural credit growth accelerated slightly to 5.9% YoY.

Kotak, IndusInd Bank, ICICI Bank, HDFC Bank are among popular stocks that one can come across the calls. The calls are optimistic from a long-term perspective — banks selling more loans and posting better revenues. However, bankers have pointed out to a major risk – the risk of NPAs and delinquencies.  

With Covid still around and reports painting a grim picture of the economy, the banking and financial sector could be exposed to the risks of NPAs and delinquencies. The moratorium that ended on August 31 has ignited a debate of sorts with a set of investors believing that banks may still not have much information to share on delinquency rates for the December quarter.  

So far two banks have on record hinted about the simmering tension. According to SBI, potential slippage and restructuring could be as high as Rs 60,000 crores for the fiscal. The Federal Bank Managing Director Shyam Srinivasan too had a note to share about slippages. In a report he said that fresh slippages per quarter could go higher by over 30 percent. According to Srinivasan the risk was not from big corporates but loans to small businesses and retail borrowers.  

An Emkay note delves into the details — “As per CIBIL, consumer-level delinquencies moved up slightly to 3.7% in Jul’20 from 3.5% in Jan’20, with Fintechs/NBFCs witnessing relatively higher deterioration. Consumer distribution by risk score suggests that the share of sub-prime and prime customers has risen to 43% in Sep’20 from 40% last year, indicating slight deterioration. The overall GNPA ratio for banks declined in Q2 due to the Supreme Court’s stay on NPA tagging, while most lenders indicated healthy collection efficiency trends in Sep/Oct’20 and thus, potentially moderate stress formation than expected earlier. Overall restructuring guidance by large private banks has been in low single digits, while mid-size private banks and select asset financing NBFCs guided for restructuring in the range of 2-6%. However, we believe that better trends on delinquencies possibly will emerge after Nov’20 as the 90days period post lifting of moratorium would be over.”

However from an opportunity perspective, this could still be a good time to strategize for an entry in banking stocks given the probability of an improvement in economy and stocks still available at a better rate. A reading of the P/E ratio of the Nifty Bank Index suggests that the highest PE in 2020 was of 41.16 set on 2 Jan 2020. It declined to 18.27, the lowest in the year as on 23 Mar.  

As of Nov 5 the Nifty PE index stands at 25.67. This is still lower than the PE on indices such as Consumer Durables, Auto, FMCG, Pharma or the Nifty50 and Nifty100 index.  

When it comes to banking stocks, the cherrypicking mantra remains – strong retail presence, history of lower NPAs and better capitalisation. The note from Emkay suggests, “Banks, in general, including healthy PSBs, are certainly at an advantage to seize the growth momentum, while potential moderation in stress formation and thus less energies focused on asset quality could help them push the paddle faster. Most banks’ growth/asset quality outlook in Q2 too supports this view. We prefer banks with relatively higher retail orientation and strong shock absorption capacity. Most preferred picks among banks are ICICI, HDFCB, SBI and Bandhan. Within NBFCs/HFCs, we prefer HDFCL and Chola.”

Here are some street calls for readers to start their research on:

State Bank of India:

Analyst TP Highlights Observation
Emkay Securities 265 Beat earnings estimates by 72% with a PAT of Rs45.7bn We like SBI among PSBs for its strong liability profile, high retail orientation, reasonable capital position and undemanding valuations (0.3x FY22E core ABV). 
Darpin Shah, HDFC Securities 317 SBIN’s 2Q earnings were ahead of estimates, led by lower-than-expected provisions. The bank reported a sharp improvement in collection efficiency to 97% in 2Q. These have been common themes across most of our coverage this quarter.  Even as we have reduced our FY21E slippage estimates to 2.8% annum, they remain conservative. YoY deposit growth was strong at 14.4% and was led by CASA growth of 15.1%. SBIN remains one of the best-placed banks in terms of deposit traction.
Nitin Aggarwal, Motilal Oswal 300 Advances grew ~7% YoY, with higher retail loans (+14.5% YoY), led by home loans (10% YoY). On the other hand, corporate loan growth was
muted at 2.8% YoY. Overall, retail credit trends are back at pre-COVID levels, with  disbursements seen in home loans (12% YoY), auto loans (27% YoY), and personal loans (61% YoY) in Sep’20. Deposit growth remains strong at ~14% YoY, with domestic CASA deposits up 15% YoY.
We believe the earnings normalization cycle for SBIN has begun as the uncertainty brought about by the pandemic is receding significantly. We sharply raise our FY21/FY22 estimates by 45%/24%, led by healthy NII and moderation in credit cost. The core bank is trading at a cheap valuation of 1x FY22E core PPoP and 2.3x FY22E P/E; we thus reiterate Buy


Analyst TP Highlights Observation
Emkay Securities 520 ICICI Bank reported a strong 62% beat on PAT at Rs42.5bn vs. est. of Rs26bn, mainly due to strong PPoP and lower provisions as the bank believes that its otherwise strong Covid-19-related provisioning buffer of Rs88bn (134bps of loans) is largely sufficient to offset expected stress formation, which itself is now lower than earlier expected. We believe that ICICI – with strong provisioning/capital buffer, higher retail orientation and high-quality management – is far better-placed in the current cycle to withstand asset-quality shocks and re-accelerate growth. Maintain Buy/OW stance in EAP with a revised TP of Rs520 (now based on 1.7x Dec 22E core bank ABV + subs valuation of Rs114).
Kotak Securities TARGET 500. STOP LOSS AT 350. (Time Horizon – 3 months) The stock is featured in KSL’s Diwali Top Picks The stock fallen vertically during the period of lockdown and Covid -19 crises. It was at 550 in the month of February 2020 and fallen to 268 levels by the end of March 2020. It is also under the pressure of sectoral weakness. However, technically, it is into gradual pull back on the upside and we could expect 480 in the near term from it. Buy 50% at current levels and balance at 375. Keep a final stop loss at 350. On the upside the rally could extend up to 480 levels.
Yes Securities 519 Stocks is in Yes Securities Diwali hot picks with an upside of 32 percent.  . Our confidence stems from a manageable ‘BB & Below’ book, restrained exposure to NBFC/HFCs, conspicuous absence/lower exposure of the bank to corporates/groups that have recently got into trouble and a high core PCR of 78% on NPLs. Concurrent trends in asset‐liability mix and an improved relative pricing power should benefit NIMs over the medium term. Along with margins and credit cost, a subtle improvement is cost metric through digitization would also be a RoA contributor. Stand‐alone bank’s RoE would likely reach 15% in FY23.

Kotak Mahindra Bank:

Analyst TP Highlights Observation
Rajiv Mehta, Yes Securities 1670 Overall a 68% earnings beat supported by better‐than‐expected PPOP and much
lower‐than‐estimated provisions
We raise FY21/22 earnings and ABV estimates by 10‐12% and 2.5‐3% respectively on the back of material upgrade in PPOP expectations (higher NII and lower cost growth now) and significant reduction in credit cost assumption. The latter being underpinned by low impeding and susceptible flow (small SC‐order slippage pool and SMA‐2 + robust customer asset mix with only 6% coming from unsecured products) and management commentary on current Covid buffer (62 bps of adv.) being adequate to address potential stress. We estimate the stand‐alone bank to deliver 20‐22% earnings CAGR on a 6‐7% loan CAGR over FY20‐22 because of expansion in core PPOP margin.

IndusInd Bank:

Analyst TP Highlights Observation
Yuvraj Choudhary, Anand Rathi 682 Higher provisions (Rs9.5bn Covid-related) led to subdued Q2 earnings
for IIB. Asset quality and PCR improved sequentially. The key positives
for the quarter were 1) strong retail deposit growth, 2) strong collection
efficiency, 3) management commentary of expected growth pick-up in
H2 FY21 and 4) strong liquidity, PCR and capitalisation to withstand
Covid-related stress. 
We maintain our positive view on the bank with a
TP of Rs682, valuing it at 1.1x P/ABV on its FY22e book
Darpin Shah, HDFC Securities 690 IIB’s 2QFY21 earnings fine print and commentary point to the bank’s increasingly prudent approach. This is indicated by (1) the continued augmentation of provision buffers, and guidance for further provisions, (2) rapidly rising share of retail deposits, (3) limited growth (for now) in relatively risky segments such as unsecured retail loans, unlike some of its peers, and (4) moderating corporate loan growth which points at a conscious re-balancing. The permanence and rewards of such an approach remain to be seen s drives our ADD rating (revised target price of Rs 690)
Motilal Oswal Securities 720 IndusInd Bank (IIB) reported a stable 2QFY21 even as the bank continued to make higher provisions. Fee income picked up sequentially while margins were impacted due to excess liquidity. Loan growth was muted while the traction in garnering deposits stood strong. PCR improved sharply to 76.7%. The bank increased COVID-19 provisioning buffer to INR21.5b. IIB reported collection efficiency of ~95% for Sep’20. The bank has guided for a restructuring book of low single digits. We increase our estimates slightly factoring in the higher NII and moderation in opex. Maintain Buy.

Bandhan Bank:

Analyst TP Highlights Observation
Darpin Shah, HDFC Securities 377 BANDHAN’s earnings were ahead of estimates on account of lower-thanexpected provisions (a recurring theme across banks this quarter). The bank fared exceptionally in terms of collection efficiency and deposit traction. We have increased our earnings estimates as we build lower provisions (although they remain elevated, given the inherent risks associated with microfinance and higher growth.  BANDHAN’s collection efficiency improved significantly, reaching ~95% in October. The core microcredit portfolio saw collection efficiency rise to 91% (95% customers by value made payments, ~80% of customers repaid in full). These trends are heartening.
Emkay Securities 425 We like Bandhan Bank for its strong liability franchise, steady asset diversification strategy, recent moves to deepen management bandwidth and ability to manage asset quality disruptions across cycles with proactive provisioning strategy.  Retain Buy/OW in EAP with a revised TP of Rs425 (based on 2.7x Dec’22 ABV).