Private banks gain up to 4%; Axis, ICICI hit new highs; HDFC nears summit

At 02:04 pm; Nifty Private Bank index was up 1.7 per cent, as compared to 0.65 per cent rise in the Nifty 50 and 0.20 per cent gain in Nifty PSU Bank index.

Shares of private sector banks were in focus and rallied up to 4 per cent on the National Stock Exchange (NSE) in Tuesday’s intra-day trade as analysts believed these banks should now give better returns given a good business outlook and inexpensive valuations.

HDFC Bank, ICICI Bank, Axis Bank and City Union Bank were up in the range of 2 per cent to 4 per cent. Of these, Axis Bank (up 3.2 per cent at Rs 1,267.50) and ICICI Bank (up 2.5 per cent at Rs 1,199.70) were trading at their respective record highs.

HDFC Bank was up 2.7 per cent at Rs 1,716.95 in intra-day trade. The stock was trading at its highest level since December 2023. It was seen inching towards its record high of Rs 1,757.80 touched on July 3, 2023.

At 02:04 pm; the Nifty Private Bank index was up 1.7 per cent, as compared to 0.65 per cent rise in the Nifty 50 and 0.20 per cent gain in Nifty PSU Bank index.

The board of directors of HDFC Bank was scheduled to meet on July 20, 2024 to announce its financial results for the quarter ended June 30, 2024 (Q1FY25). While, ICICI Bank's board is scheduled to declare its Q1FY25 results on July 27, 2024.

Despite a lower loan growth environment, analysts at Macquarie expect private sector banks to report healthy ROAs and ROEs over the next three years and remain steady power of compounding stories. “We expect healthy ROEs in the 16-18 per cent range. They are less affected by ECL regulations and carry contingent buffers (most of them) and we do not see any adverse asset quality outlook. A delayed rate cut cycle further cushions NIMs for them in the near term,” the brokerage firm said in India Financials report.

Going into FY25F, analysts at Nomura argue that deposit positives due to flows from the JP Morgan bond index inclusion can be offset by a ‘normal’ pick-up in currency in circulation in the system (which was not seen in FY24 due to the Rs 2,000 note withdrawal by the RBI). Any sustainable pick-up in deposit growth (above our base case of 13 per cent YoY for FY25F) will, hence, require substantial increase in bank credit to the government or forex assets purchases by the RBI, the foreign broker said.

“In the absence of these, we think liquidity coverage ratio (LCR) and loan-to-deposit ratio (LDR) should continue to be system loan growth constraints. We continue to have a ‘value’-focused approach amid the broader convergence in RoEs across the sector, with a preference for more liquid banks,” Nomura said in Indian Banks report.

Meanwhile, analysts at CLSA believe Indian banks are well placed after a rollercoaster decade. Balance sheets are the strongest they have been in over a decade and profits have rebounded sharply (quadrupling in 10 years). Sector ROE is at its highest since FY11. Loan growth has picked up from an average of 10 per cent over FY12-22 to 15 per cent over the past two years and deposit growth should follow. Against this backdrop, PSU Banks outperformed private sector banks by c.80ppt/100ppt in the past 1- year/5-year from a low base, the brokerage firm said in banking sector outlook.

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). The key short-term risk is a sharp repo rate cut that would reverse the NIM improvement banks have delivered, CLSA said.

HDFC Bank is the best run bank with a track record of strong growth and profitability for over two decades. However, return ratios and loan growth have moderated due to the merger and would take a few years to normalize. Valuations have come off significantly, in the past five years thus making risk-reward healthy, despite the lower profitability, the brokerage firm said.

Meanwhile, Axis Bank hit a new high of Rs 1,267.50, up 3 per cent in intra-day trade, and has rallied 7 per cent in past one week. ICICI Securities has a ‘buy’ rating on Axis Bank with a target price of Rs 1,300 per share.

With another year of sustained operational performance, the bank has been growing as per the prescribed roadmap achieving continued improvement in RoE. Targeting continued growth momentum (~16 per cent CAGR) with cushion on margins (3.9-4 per cent) and anticipation of benign credit cost (50-60 bps), the bank is well positioned to continue to deliver RoA at 1.8-1.9 per cent, the brokerage firm said in March quarter result update.