In Tuesday's intraday session, shares of private sector banks gained up to 4% on the National Stock Exchange (NSE) as investors were more confident that these banks would now provide higher returns due to their favorable business outlook and low valuations.
Axis Bank, City Union Bank, HDFC Bank, and ICICI Bank all saw increases of two to four percent. Among them, Axis Bank, which was up 3.2% at Rs 1,267.50, and ICICI Bank, which was up 2.5% at Rs 1,199.70, were both trading at record highs.
In intraday trading, HDFC Bank gained 2.7 percent to Rs 1,716.95. It was the highest level the stock has been trading since December 2023. It was observed edging closer to the all-time high of Rs 1,757.80, which was reached on July 3, 2023. The Nifty Private Bank index was up 1.7% at 02:04 PM, while the Nifty 50 and Nifty PSU Bank index were up 0.65% and 0.2%, respectively.
On July 20, 2024, the HDFC Bank board of directors was to meet in order to declare the bank's financial results for the quarter that concluded on June 30, 2024 (Q1FY25). On July 27, 2024, the board of ICICI Bank is expected to announce the results of the Q1FY25.
Analysts at Macquarie anticipate that over the next three years, private sector banks will continue to record strong ROAs and ROEs and maintain their consistent ability to compound stories, even in an environment with slower loan growth. "Healthy ROEs in the 16–18% range are what we anticipate." Most of them have contingency buffers, so they are less impacted by ECL restrictions, and there is no indication of a bad asset quality outlook. The brokerage company stated in the India Financials report that "a delayed rate cut cycle further cushions NIMs for them in the near term."
Analysts at Nomura contend that, heading into FY25F, deposit positives resulting from the JP Morgan bond index inclusion can be counterbalanced by a "normal" recovery in the amount of money in circulation within the system (which was not observed in FY24 due to the Reserve Bank of India's removal of Rs 2,000 notes). According to the foreign broker, any sustained acceleration of deposit growth (beyond our base scenario of 13% YoY for FY25F) will thus either a significant rise in bank lending to the government or purchases of foreign exchange assets by the RBI.
"We believe that the loan-to-deposit ratio (LDR) and liquidity coverage ratio (LCR) should remain system credit growth restrictions in the absence of these. As the sector's RoEs continue to converge, we maintain a "value"-focused strategy and favor more liquid banks, Nomura stated in the Indian Banks report.
After a turbulent ten years, experts at CLSA think Indian banks are in a good position. The earnings have increased dramatically (quadrupling in ten years) and the balance sheets are the healthiest they have been in over a decade. It is the greatest sector ROE since FY11. Over the last two years, loan growth has increased from an average of 10% during FY12–22 to 15%, and deposit growth should follow. In light of this, PSU Banks have surpassed private sector banks by c.80ppt/100ppt over the last year and a half, starting from a low base, according to the brokerage firm's banking sector forecast.
Historically undervalued in the stock market, private sector banks could now yield higher returns due to their favorable business outlook and low valuations (10–15x PE compared to the NIFTY50's 18x). According to CLSA, the main short-term risk is a steep reduction in repo rates, which would undo the NIM growth that banks have achieved.
The finest bank is HDFC Bank, which has demonstrated consistent growth and profitability for more than 20 years. It will take several years for return ratios and loan growth to stabilize, as a result of the merger. Despite the decreased profitability, the brokerage business stated that valuations had decreased dramatically over the last five years, indicating a favorable risk-reward ratio.
In the meantime, Axis Bank surged 7% during the previous week and reached a record high of Rs 1,267.50, up 3% in intraday trading. Axis Bank is rated as a "buy" by ICICI Securities, with a target price of Rs 1,300 per share.
The bank has continued to develop in accordance with the recommended roadmap, producing continuous improvement in RoE, and has achieved another year of consistent operational success. Aiming for sustained growth momentum (~16 percent CAGR), the bank is well-positioned to maintain RoA at 1.8–1.9 per cent, the brokerage company stated in its March quarter result update, with a cushion on margins (3.9–4%) and forecast of benign credit cost (50–60 bps).
