For long, retail banks like HDFC Bank were the preferred stock bets for analysts as retail segment for HDFC Bank was booming. Thanks to the retail segment, the bank also saw the best performance in terms of controlling NPAs and its stock outperformed its larger peers. However, now analysts believe that the tide is slowly turning in favour of the banks that have high levels of corporate lending like SBI, Axis and ICICI Bank and these remain good stock picks.
Strong balance sheets, strong capital ratios, high provision coverage
Some of these banks according to India Strategy Financials Report from Motilal Oswal Financial Services can benefit from multiple factors.
"As growth picks up, the earnings momentum of corporate banks coupled with the valuation of headroom can serve as the twin catalysts of performance. In the decade ahead, large banks such as SBI, ICICI Bank and Axis Bank have undergone adverse corporate asset quality cycles, which bottomed out over FY 18-19. These banks have also beefed up their balance sheets by raising capital during the pandemic and emerged stronger in FY21 with the solid performance on PPOP/earnings and asset quality.
Motilal Oswal Financial Services expects the pace of market share gains in large private banks to accelerate sharply during this decade owing to their (a) strong balance sheets, (b) competitive cost of funds, (c) higher provision coverage on the existing stressed pool, and (d) strong capital ratios," the report says.
According to the Motilal Financial Services report most banks are currently trading either below or near their long-term average multiples.
"As the corporate cycle strengthens further and growth picks up, the earnings momentum of corporate banks coupled with the valuation headroom can serve as twin catalysts for outperformance. Typically when the cycle turns, the valuation multiple of stock shifts from the lows to highs and doesn't trade at average multiples of the cycle. This shift in valuation multiple expansion from lows to highs drives outsized gains. The preferred buy stock ideas are ICICI Bank, SBI, and Axis Bank," the report has stated.
Stocks have fared well in the past year
ICICI Bank, Axis Bank and SBI have all performed much better than HDFC Bank over the last 1-year. Let's take a look at the price performance for these three stocks.
|Share price on June 21||52-week low||52-week high|
The stocks of ICICI Bank, Axis Bank and State Bank of India have all rallied sharply from 52-week lows, with SBI having been the best performer.
Over March'10-May'21, while HDFC Bank multiplied 9.5 times, SBI, ICICI and Axis stocks returned only 2.8-4.8 times, signifying the scale of underperformance over the likes of HDFC Bank.
The tide may just be turning now and over the next decade corporate oriented banks may just do better owing to the facts listed above.
The above stocks are based on the report of Motilal Oswal. Investing in stocks are risky and investors should do their own research. The author, the brokerage firm or Greynium Information Technologies are not responsible for any losses incurred due to a decision based on the above article. Investors should hence exercise due caution as markets have run-up significantly. Please consult a professional advisor.