Indian Banks Well-Placed After A Rollercoaster Decade, CLSA Says

CLSA expects private sector banks, which have been stock market laggards, to give better returns amid good business outlook and inexpensive valuations
Indian Banks Well-Placed After A Rollercoaster Decade, CLSA Says

Brokerage CLSA said the Indian banks are well-placed after a rollercoaster decade, supported by stronger balance sheets, record profits and inexpensive valuations.

Banks have a much stronger balance sheet today as compared to five or ten years ago, CLSA said in an investor note. Banks are not only well capitalized, but they also have the lowest net non-performing loan/net worth ratio in more than a decade, driven by better asset quality, stronger provision buffers and an improved capital position, it added.

The brokerage noted the quality of corporate credit, too, has improved over the past five to seven years.

CLSA also said the banking sector has seen a rebound in profits as well as profitability, with return on equity (RoE) of 15% in FY24, the highest since FY11.

“In this context, PSU banks have re-rated sharply from a low base, while private sector banks have been laggards. We expect the underperformance of the latter to reverse,” analysts Piran Engineer, Shreya Shivani, and Roshny Munshi wrote in the note.

LOAN GROWTH

The brokerage said the banking sector loan growth has picked up from a decadal average of 10% to 15% over the past two years, driven by all sub-segments and possibly some shift from corporate bond substitution.

A degree of normalization is expected in unsecured loan growth from over 20% to mid-to-high teens, but overall loan growth is likely be at 14%-15% over the next two years, it added.

“We expect private sector banks to continue gaining market share,” CLSA said. “However, FY25 loan growth across our coverage banks is likely to be divergent due to idiosyncratic issues.”

DEPOSIT GROWTH

The brokerage said the lower deposit growth in the past two years could be attributed to lower reserve money growth, but the deposit growth is also expected to pick up.

One notable trend over the past decade is that private sector banks have outpaced PSU banks in current account deposits by a margin and have also pared down non-deposit borrowings, it added.

CLSA said this gives them a funding cost similar/marginally better than that of PSU banks, making them competitive on the loan side.

COMPELLING VALUATIONS

The brokerage said banks have underperformed the broader index by a wide margin in the past five years. Specifically, this is driven by private sector banks that have underperformed PSU banks by around 80 percentage points in the past year alone, it noted.

Source: CLSA

CLSA said the private sector banks, which have been stock market laggards, should now give better returns, given a good business outlook and inexpensive valuations (10-15x PE versus the Nifty50 at 18x).

“We like large banks in our coverage, with a preference for ICICI Bank and IIB (IndusInd Bank), it noted. The brokerage has a target price of 1,350 rupees per share on ICICI Bank and 1,900 rupees on IndusInd Bank.

CLSA noted the key short-term risk is a sharp repo rate cut that would reverse the net interest margin improvement banks have delivered.

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