Kotak Institutional Equities thinks PSU lenders have a better edge; Raises target price for some banks

After a spectacular quarter reported by the banking sector in the second quarter, brokerage Kotak Institutional Equities (KIE) raised target prices for some public sector lenders in its coverage based on strong trading performance. The brokerage believes that Tier 2 banks such as public sector and regional banks have a better advantage than frontline banks.

The brokerage, however, remains bullish across the banking space and maintains the investment thesis that we are still early in the credit cycle currently and the visibility of a sharp deterioration in asset quality appears low.

“We are upgrading the fair values ​​of hedged banks in part to reflect the higher confidence in earnings thanks to lower credit costs, better than expected loan growth and, consequently, operating profit growth. The increase in fair values ​​mainly concerns second-tier banks (public banks and regional banks), which traded below or closer to the book value where we see the bulk of the improvement in business performance,” the brokerage said.

The brokerage increased the target price by Bank of Baroda at 180 from 165 earlier. The new target implies an 8% upside from its current market price. He also increased the target price by Canara Bank at 340 (from 285 earlier), indicating a potential upside of 7% now. National Bank of Punjab the objective has also changed from 45 earlier for 54, implying a potential upside of 12%. Finally, the target price of Karur Vysia Bank has been upgraded to 120 (from 110 earlier), 18% increase observed.

Stock price trend

The brokerage further pointed out that there has been a very strong increase in price performance at these banks over the past few years. Regional banks, state-owned banks and non-frontline private banks have experienced strong price increases and are outperforming frontline private banks.

Over the past month, Clever power bank jumped 22% vs. a 4% rise Clever bank. Meanwhile, on a YTD basis, the PSU Bank index is up 60% vs. a 21% rise for Nifty Bank and over the past year, Nifty PSU Bank is up 46% vs. a 15% rise. % for Nifty Bank.

In 2022 year-to-date, among PSU banks, Bank of Baroda jumped the most, giving multibagger returns, up 107%, followed by Indian bank (up 99%), Union Bank (up 78%), Canara Bank (63%), Bank of India (58%) and UCO Bank (58 percent). Other PSU banks, including Bank of MaharashtraNational Bank of Punjab, SBIand central bank of india also delivered double-digit returns over this period, up 20-45%.

Meanwhile, among frontline banks, HDFC Bank and Kotak Bank gave single-digit returns in 2022 year-to-date, up 9% and 8%, respectively. Meanwhile, ICICI Bank added 25 percent and Axis Bank is up 30% during this period.

Investment thesis

The brokerage said its positive investment thesis at this point for the sector is relatively straightforward.

“We believe the sector is still in the very early stages of post-Covid recovery. We are currently seeing strong intent to lend from debt capital providers. Banks, especially state-owned banks, which had been impacted by the corporate NPL cycle, have come back strongly in recent quarters. This has translated into a sharp decline in credit costs in recent quarters and a strong improvement in asset quality ratios. We are also seeing public banks, regional banks and NBFCs are more comfortable growing their balance sheets as well,” he explained.

He also pointed out that with a large flow of funds, the likelihood of non-performing loan (NPL) ratios falling further is still high, implying that lower credit costs in banks could also be visible for a while. much longer period.

KIE also mentioned that this decline in credit costs implies that RoE (return on equity) is likely to approach the industry average fairly quickly from here and that the dispersion of RoE, which has been quite high these years, converges for most banks. It also slightly changed its cost of equity estimates to account for the same.

Macro risks

KIE recognizes that the macro risks are still quite high and may warrant a change of heart. However, it’s difficult to build an investment thesis that currently hinges on a potential downturn until it can assess the impact of that downturn, he noted.

“It does look like growth could be slower rather than a repeat of the corporate NPL cycle. We saw that the slowdown caused by the capex slowdown was different from the Covid-caused slowdown on the banks. Public or large banks private banks have had a negligible impact during the Covid cycle while they have been deeply affected during the corporate downturn.As such, we have yet to see an asset bubble currently, either in the corporate sector via a large investment cycle or in the real estate sector These are typically sectors that can potentially lead to a sharp downturn and therefore high loss rates Note that the loan portfolio matters more retail lending in the current cycle and therefore the likelihood of a higher cost of credit appears to be lower.comfortable despite the recent e rising interest rates,” the brokerage warned.

Q2 benefits

The banking sector recorded a strong Results for the September quarter (Q2FY23), driven by healthy loan growth, expanding margins and continued moderation in provisions. Loan growth was driven by sustained momentum in the Retail and SME (small and medium-sized enterprises) segments, as well as a strong recovery in corporate loans.

Only the Punjab National Bank (PNB) recorded a year-on-year (YoY) decline in profit after tax (PAT) in the September quarter as provisions for non-performing assets rose. All other banks recorded solid profit growth for the quarter under review. In fact, eight of them posted a more than 50% jump in profit in the second quarter.

Outlook

Brokerage Bank of America Securities (BofA Sec), in a recent report, said: “Public banks are now guiding steady growth – in line with or above the system. Overall PSO loan growth in FY22 improved to 8.8% (vs. 16% for private banks), the highest level since FY14. More importantly, PSB growth was broader across all segments.”

Meanwhile, Satish Menon, Managing Director of Geojit Financial Services, said, “A steep PSB valuation discount and improved quarterly results reflecting business growth, buffer supply and asset quality drove on recovery. PSB’s GNPA has more than halved. from a peak of 14.6% in FY18. A huge valuation gap between private and public sector banks created the arbitrage opportunity. However, spreads quickly narrowed, limiting short-term upside. While in the long term, the revaluation should expand.

Disclaimer: The opinions and recommendations made above are those of individual analysts or brokerage firms, and not of MintGenie.

YTD yield of bank stocks.

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