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Banking shares were outperforming the markets on Tuesday, February 20, led by HDFC Bank, Axis Bank, and Kotak Mahindra Bank.
Shares of HDFC Bank gained 2 per cent to Rs 1,447.5 apiece in the intraday trade after global brokerage Citi gave a 'buy' rating on the stock with a target price of Rs 2,050 per share. This is 44.6 per cent higher than the stock's current market price.
The bullish call came after the lender held its Analysts' Day, where the management pointed out its future growth plans.
HDFC Bank is aiming to maintain healthy incremental liquidity deposit ratio (LDR) and liquidity coverage ratio (LCR). To offset increased funding costs, we plan to adjust lending rates accordingly. We also aim to maintain net interest margin (NIM) and return on assets (RoA) within the targeted range, the management said.
Analysts at the brokerage believe the lender is poised for a profitable growth in the future given its robust and sustainable franchise.
"The recent developments at Paytm have also bolstered HDFC Bank's optimism about potential opportunities. It can leverage the group's capabilities to increase its share in third-party distribution," Citi noted.
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Separetely, the other top gainer from the financial pack was Kotak Mahindra Bank. The stock gained 1.7 per cent intraday to Rs 1,762.3 apiece.
The upmove comes after Ashok Vaswani, the newly-appointed managing director and chief executive officer of the bank, announced key leadership changes on Monday. He has elevated KVS Manian as joint managing director, and Shanti Ekambaram as the deputy managing director. READ ABOUT IT HERE
The other appointments include Devang Gheewalla succeeding Jaimin Bhatt as the group chief financial officer with effect from April 1, Milind Nagnur has been elevated as chief operating officer from April 1, and Paul Parambi has been elevated as the group chief risk officer effective March 1.
Meanwhile, Axis Bank, Punjab National Bank, Bank of Baroda, ICICI Bank, AU Small Finance Bank, and State Bank of India were the other gainers in the Nifty Bank index, ruling higher in the range of 0.2 per cent to 1.4 per cent. By comparison, the index was up 0.8 per cent at 12:40 PM, while the Nifty50 was up 0.14 per cent.
According to analysts at Kotak Institutional Equities, earnings for the December quarter across banks, and NBFCs did not show any worrying signs. Earnings growth slowed down for banks, led by slower net interest income (NII) growth due to net interest margin (NIM) compression that slows down operating profits. Asset quality, despite concerns raised on unsecured loans, is still showing improving/stable trends.
Banks under their coverage delivered 13 per cent year-on-year earnings growth, led by 11 per cent Y-o-Y NII growth and ~45 per cent Y-o-Y provision decline. Operating profit growth was lower due to higher staff costs for SBI, but the overall trend has slowed, led by NIM compression across banks.
Loan growth, it said, is still showing stable trends (adjusted for the HDFC Bank merger) at ~15 per cent Y-o-Y. Credit costs are still running well below the long-term average, led by lower slippages. Return on equity (RoE) is closer to long-term averages for all banks. The impact of CET-1 across banks due to changes in RWA was negligible.
"In the near term, we expect NIM compression to continue, as deposit growth is still yet to catch up with loan growth. We have seen a re-rating in public banks and would have a more cautious approach to build an investment theme on credit costs, but would shift our preference to large banks over mid and small tier banks," it said.
Echoing similar views, analysts at InCred Equities said public sector banks (PSBs) are better placed on the liquidity front compared to private sector banks with their lower loan-to-deposit ratio (LDR) and higher liquidity coverage ratio (LCR).
However, unlike private banks, most large PSBs (excl. State Bank of India) have a significant share of wholesale deposits, which are available expensively whereas their lending continues to remain corporate and mortgage-heavy, where passing on the high interest rates is difficult.
"We believe the margin pressure for a couple of quarters is inevitable for all banks, until the policy easing cycle starts. Even after that, immediate relief is difficult, because the decline in lending rates would be faster compared to the repricing of deposit rates due to a higher share of variable-rate loans in the system," it said.
With tight liquidity, weak retail deposit momentum and volatile, yet expensive, wholesale deposit rates, bankers may remain selective in managing credit demand.
"Most lenders, who prefer profitability against growth, have abstained from tightly priced corporate loans and chose retail loans to utilise the available liquidity at an optimum level. We also expect superior momentum in unsecured retail loans due to better pricing and improved underwriting," analysts at InCred Equities added.
