2 Banking Stocks To Buy Post Q3 Results For Over 35% Upside In 1-Year

Axis Securities has issued a buy recommendation on the shares of City Union Bank and State Bank of India (SBI). The brokerage has set a target price of Rs 200 for City Union Bank, implying a potential upside of 43 percent from the current market price of Rs 139.70 as of 7 February, 3:30 pm IST. SBI, on the other hand, has received a target price of Rs 720, and the stock has a 35 percent upside potential from its current market price of Rs 533.90 as of 7 February, 3:30 pm IST.

City Union Bank

Axis Securities has said in its research report that "City Union Bank (CUB) earnings traction continues on track with a PAT growth of 15.4%/7.7% YoY/QoQ to Rs 1.9 Bn led by lower provisions and improved asset quality. Stress is well managed and restructuring is contained at ~5.8% and a lower slippage ratio of ~2.9% (down from 3.2% QoQ). G/NNPA has improved to 5.2%/3.4% YoY/QoQ, down 37bps/3bps QoQ. Reported PCR is healthy at ~62%. NIM remains largely stable at ~4% and should improve as the loan mix improves. Loan growth was moderate at 6.9% YoY and 3.4% QoQ. Operating profits were muted (down 17.6%/8.85 YoY/QoQ) on account of lower treasury impact."

The brokerage claims that "Management indicated loan growth to come in higher to a low double-digit in FY22-FY23. Opportunities to grow faster will be eyed keeping pricing and risks in place. It remains confident in the restructured book expecting a faster recovery over the coming period. SMA1 /SMA2 in the ECLGS book has come down from 4.7% to 2.9%. Overall SMA2 book has come down to 2% from 2.6% QoQ."

Axis Securities has also highlighted that "The management expects a pick-up in operating performance as business activities normalise post the COVID 2.0 impact and ROA to normalise to 1.5% by FY23. Overall stress in asset quality will be within control for FY22E. We believe with the granular credit portfolio and strong underwriting, the bank will be able to contain the loss-given defaults (LGD). CUB has a niche quality franchise with a proven history of conservative lending, differentiating it from similar-sized peers. We maintain a positive outlook on the stock with a BUY rating and arrive at a target price of Rs 200/share (1.9x FY24 ABV)."

State Bank of India (SBI)

The brokerage has noted that "SBI's earnings traction continued in Q3FY22 and was up 62% YoY, led by a 33% YoY decline in provisions and 7% YoY growth in PPOP. The bank continues to positively surprise the asset quality front with slippages of 0.4%, restructured book at 1.2%, and lower SMA book (~16bps) during Q3FY22. Loan book growth accelerated in Q3FY22 to 8.9% YoY with healthy retail book growth of 14.5% (Home Loans grew 11%). Performance in Corporate loans revived and reported growth of 3.5% QoQ with the management once again flagging large unutilised working capital limits worth about Rs 2 Tn. NIM remained stable at ~3.4%. Fee income growth was healthy at 7.4%/6.6% YoY/QoQ."

Axis Securities has also said that "The unutilized limit within Corporate loans moderated to 43% vs. 52% earlier. Growth trends are likely to continue to show strong traction, led by a pickup across most segments. The bank remains committed to delivering 15% RoE on a sustainable basis. The management expects loan growth to pick up to ~9% by FY22 and credit costs to be maintained at current levels."

The brokerage has claimed that "The bank's asset quality performance has been significantly better than expectations including eventually stressed asset accruals which indicates credit costs normalisation over FY22-23E. We believe SBIN's unsecured lending profile is strong with >90% to salaried government employees. Retail book traction at 15% remains healthy, supported by home loans, and express credit, and further improvement is likely in the coming quarters. Currently, the Bank's market share in Home loans and Auto Loans is over 20%. Among PSU banks, SBI, with a healthy PCR, robust capitalization, a strong liability franchise, and an improved asset quality outlook, remains the best play on the gradual recovery of the Indian economy. We believe normalisation in credit costs and improved growth outlook should lead to double-digit ROEs of +15% over FY22-24E. We maintain BUY on the stock with a revised target price of Rs 720/share (SOTP basis core book at 1.3x FY24E and subsidiaries at Rs 211)."

Disclaimer

The stocks have been picked from the brokerage report of Axis Securities. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.