Banks 4th Quarter To Be Strong, Watch Out For These 4 Banking Stocks To Buy

Emkay Global has come out with its latest report on the BFSI sector. According to the report, the fourth quarter of banks is likely to be strong.

Better growth and asset quality lead to healthy profitability

"Most banks under our coverage reported higher-than-expected earnings, mainly led by strong credit growth, better margins (lower CoF, interest reversal on NPAs, better LDR) and lower loan loss provisions as asset quality improved meaningfully. However, lower treasury gains/MTM on bonds and higher opex (mainly for large private banks) to support the surge in business volumes, including cards/retail credit, partly moderated the earnings beat," the brokerage has said.

Among public sector banks, SBI, Bank of Baroda and Canara Bank were clear outliers, while Indian Bank disappointed a bit in terms of growth/earnings.

"Among private banks (PVBs), ICICI Bank was a clear outlier, while Axis Bank sprung a surprise on growth, margins and asset quality.

Kotak Mahindra Bank too reported strong consistent growth/margins, but HDFCB disappointed on margins/fees. IIB continued to struggle with growth/asset quality. Among small/mid-size banks, Federal was a clear outlier, followed by KVB/CUBK. Bandhan returned to profitability, but asset quality remains a concern in the near term. We expect Q4 to be strong for banks in general on the back of better growth/NIMs and asset quality. ICICI Bank, Axis Bank, SBI and BOB will be the key stocks to watch out for," the brokerage has said.

Overall credit growth accelerates led by continued strong consumer credit growth and corporate revival

Overall systemic credit in Q3 stood high at 9%, mainly led by a surge in corporate credit (for large PSBs/PVBs) and accelerated growth in the consumer retail segment (including mortgages, cards), the brokerage said.

"PL is also showing signs of pick-up, but with some setbacks possibly in Jan'22. Car finance growth was sub-par due to underlying weak volumes (impact of chip shortage), while new CV too remained a laggard. Business Banking/SBL segments witnessed acceleration as asset quality risks receded, while MFIs resumed aggressive growth despite continued sub-par collection trends. Credit growth in early Jan'22 moderated a bit to 8% due to run-off of short-term corporate loans and banks turning risk-averse due to a surge in Covid cases. With the pandemic's impact ebbing, we expect credit growth to reaccelerate, led by strong consistent growth impulses in consumer retail, some pick-up in commercial retail and seasonal pick-up in corporate credit, along with disintermediation from bond markets as rates rise," Emkay Global has said.

Retain buy on HDFC Bank stock

"We believe that as the asset quality pain is largely behind, barring select segments, accelerating credit growth should drive up valuations for banks. Deposit/money market rates have inched up, casting some pressure on NIMs, but better LDR and lower interest reversals should protect NIMs in the near term. Rising bond yields may hurt PSBs in terms of MTM provisions, but better investment yields, lower retirement liability and disintermediation from the bond market supporting credit growth could largely offset the negative factors. Among large banks, ICICI Bank remains our top pick, while Axis Bank has moved up the order, followed by SBI. Retain Buy on HDFC Bank, but its relatively sub-par margin/fee performance and continued embargo on digital initiatives remain irritants for the near term. IIB will remain side-ways until growth accelerates, while the asset quality risk on CV/MFI is behind. Among small/mid-size banks, we like Federal, Indian Bank and Equitas SFB," the brokerage has said.