As the year draws to a close, it's time to evaluate your portfolio and look at stocks that can generate decent returns in 2021. Here are 4 banking and finance stocks that have the potential to give returns. These have been picked from a report by Motilal Oswal Institutional Equities:
1) ICICI Bank
According to Motilal Oswal Institutional Equities, ICICI Bank continues to see strong growth in retail deposits and has succeeded in building a robust liability franchise over the past few years. The bank's total deposits reported a 16% CAGR over FY15-20, with CASA at a 16% CAGR.
As a result, the bank has one of the highest CASA mixes among peers. ICICI Bank also has one of the lowest funding costs among the private banks, enabling it to underwrite profitable businesses without taking undue balance sheet risks. Retail fees form 76% of bank fees, signifying the granularity in fee income. However, due to the recent slowdown, fee growth trends to remain moderate and pick up gradually.
Asset quality to remain under pressure. Expect the BB & Below pool to increase in the coming quarters, and slippage trends would thus remain elevated.
"Business trends are showing improvement, with disbursements reaching pre-COVID levels / higher than pre-COVID levels (in some segments). The liability franchise continues to improve, with cost of deposits declining to 4.2%, while a lower CD ratio provides a strong growth opportunity. We expect RoA/RoE of 1.4%/12.8% for FY22E," the brokerage has noted.
2) Muthoot Finance
Motilal Oswal Institutional Equities expects growth to continue over the near-to-medium term given elevated gold prices and higher gold loan demand due to the lockdown impact on customers.
"Positive ALM (due to short loan tenure of up to 12 months) and adequate balance sheet liquidity have helped Muthoot access debt capital with relative ease. The company is well capitalized with Tier I ratio of 25% - we do not foresee any dilution in the medium term even if AUM growth continues at 20% YoY," the report from the broking firm has stated.
Sluggish performance on number of customers/loans remains a worry.
Given the improvement in overall economic environment, the asset quality impact on subsidiaries would not be as bad as earlier anticipated.
Motilal Oswal expects Muthoot to deliver 20% YoY AUM growth in FY21 and 15% CAGR thereafter. RoA/RoE is likely to remain robust at 6.8%/25% over the medium term
3) M&M Financials
According to Motilal Oswal institutional Equities, given its strong parentage, MMFS has been able to easily raise money from the banking system and capital markets. In addition to lower cost of funds, reduced balance sheet liquidity would aid margins, while asset quality numbers are encouraging. The brokerage forecasts 4.4% credit cost for FY21 and FY22.
It also sees a decline in the cost of funds, lower-than-expected stress addition, and moderation of excess liquidity should result in an 80-120bp improvement in margins for MMFS.
Slowdown in the CV segment.
"While we expect an uptick in 2H, overall loan growth should be in the mid-single digits. We expect MMFS to deliver low-to-mid single-digit AUM growth. MMFS should deliver a normalized RoA of 2% and RoE of 10% in FY23E," the brokerage has stated.
4) LIC Housing Finance
According to Motilal Oswal Institutional Equities, LIC Housing Finance has kept the loan mix stable over the past six quarters - a positive in this environment.
"Given its parentage, it has been able to raise debt capital at low rates, which should keep margins steady in these tough times. Improvement in disbursements in Q2FY21 is encouraging. Further collection efficiency of 96% in the month of Sep'20 is reassuring," the brokerage has stated.
Over the past two years, LICHF's GNPL ratio has increased 150bp to 2.8%, driven by both retail and corporate delinquencies.
"While loan growth is muted currently, it should start picking up given the healthy trends witnessed in Sep-Oct'20. We forecast 8% loan book CAGR over the next three years," Motilal Oswal has said.