2 Banking Stocks That Motilal Oswal Prefers

A Swift turn in the rate cycle has seen lending rates for fresh loans rise sharply, Motilal Oswal has said in a report.

"As per an RBI May'22 release, the Weighted Average Lending Rates (WALR) on fresh loans has increased by 35bp MoM, with private Banks seeing a 26bp MoM increase v/s a 37bp rise for PSU Banks. As a result, the Weighted Average Lending Rates (WALR) on outstanding loans rose a sharp 14bp MoM to 9.76% for private Banks. The increase moderated slightly for PSU Banks (up 3bp MoM) at 8.23%," Motilal Oswal has said in a report.

"The Weighted Average Term Deposit Cost (WATDR) for the Banking system has risen marginally (up 4bp MoM) to 5.07%. This was led by a sharp 6bp MoM increase for private Banks as the competitive intensity to garner deposits is higher compared to PSU Banks, which saw an increase of 2bp MoM. With more rate hikes in the near term, the cost of funding across PSU and private Banks has bottomed out. The potential changes in TD/saving rates will drive the movement in portfolio deposit cost," the brokerage has said.

"We expect Banks to gradually increase their lending yields as RBI has raised the repo rate by 90bp over the last two months. We expect a repo rate hike of 60-75bp over FY23. A higher CASA mix and a calibrated increase in deposit rates, given the ample liquidity, will help limit the increase in portfolio deposit costs. Banks with a higher mix of floating rate book stands to benefit from the turn in the rate cycle. We continue to prefer ICICI Bank and State Bank of India," Motilal Oswal has said.

"All Banks have recently increased their term deposit rates, following the hike in the repo rate by RBI. As Banks continue to fight over deposits and RBI raises rates further, we expect Banks to increase their deposit rates. However, a calibrated increase in deposit rates, given the ample liquidity and healthy CASA mix, will limit the increase in overall funding costs. Large Banks, with a strong CASA ratio, are better placed to navigate the challenge of rising cost of funds," the brokerage has said.