HDFC Bank to SBI, what's working and what's not for banking stocks

Most banking stocks haven’t had it easy on the bourses.While stocks of state-owned banks remain big laggards, many private sector peers haven’t been spared either. Based on recent brokerage recommendations, here are six stocks - three that have seen an increase in their target price since June, and three that have seen a cut. 

Target price raised 

HDFC Bank 

Growth may have tapered a bit for one of India’s best managed banks. Loan growth, even in September quarter (Q2) at 19 per cent, came below the historical growth rate of 25 per cent plus for a second quarter in a row. The bank is also finding hard to retain its share of low-cost current account - saving account (CASA) deposits, which further slipped to 39.2 per cent in Q2. Yet, analysts at Morgan Stanley term the stock as a compounding machine and aren’t worried about the temporary blip in growth.

There has been some pressure on asset quality, but it remains among the best in industry.

ICICI Bank

Many global brokerages including Nomura and Morgan Stanley have lately increased their exposure to the stock. Robust and granular growth, comfortable level of unsecured loans and well balanced CASA deposits (45 per cent in June quarter) work to its advantage. Seen as an example of asset quality turnaround, analysts believe that the worst is behind the bank, explaining why the Street is turning incrementally positive on the stock.

City Union Bank 

This mid-cap banking stock is fast becoming the preferred pick in the sector. Paucity of quality names and its ability to demonstrate consistent growth is helping City Union Bank gain prominence among investors. Domestic brokerages such as Edelweiss and Motilal Oswal Financial Services have tall expectations from the stock given its regional dominance in the south and more so among small traders and businessmen.

Target price lowered 

Axis Bank 

The stock’s bull-run was disrupted post its June quarter results when management commentary turned cautious on growth and asset quality. There was little evidence that asset quality pressures are arrested. While the bank fared well on loan growth and profitability, accretion of further stress and its decision to provide for non-fund based loan exposure hasn’t gone well with investors.

RBL Bank

The bank’s name being tagged with every new account that came under stress lately, has hammered its stock price. Despite the bank clarifying its position, it hasn’t been enough to soothe investors. The gross non-performing assets ratio guidance of over two per cent for FY20 also weighs on the stock, which recently fell below its listing price, though it subsequently recovered the losses.

State Bank of India 

State Bank of India (SBI) is a case of how its size and presence is beginning to turn against it. Analysts at Morgan Stanley believe that being India’s largest bank, the economic slump could restrict SBI’s ability to grow its loan book and hence delay its revival story. Huge sums stuck in the resolution process and little evidence that asset quality woes are easing are also dragging the stock.