Stocks To Buy: Emkay Global Suggests Buy Top 13 Banking Stocks For Gains Up 56%, Details Inside

Emkay Global in its recently published report on BFSI- Bank sector has given "buy" call to top banking stocks namely Axis Bank, HDFC Bank, ICICI Bank, IndusInd Bank, Kotak Mahindra Bank, City Union Bank, Federal Bank, Karur Vysya Bank, Equitas SFB, Bank Of Baroda, Canara Bank, Indian Bank, and State Bank Of India with a potential upside up to 56%. Below are the key highlights of the report.

Credit growth accelerates further; is now broad-based and, hence, more sustainable

According to the brokerage, Credit growth further accelerated to 16.2% (9-Sep-2022) from 14.4%/9.6% in Jun-2022/FY22, respectively, shrugging off macro-concerns. The growth is now turning broad-based, with improving signs of corporate growth led by working-capital demand, while retail growth continues to be robust led by the strong underlying consumption demand. Within the retail segment, mortgages remain the key growth driver, while cards/PL, MFI and even the vehicle financing segment have seen a strong rebound. Among large PVBs, HDFCB/IIB have reported robust growth. ICICI and Kotak too are expected to clock >20% YoY/4% QoQ growth, with the main growth driver being retail; for Axis, growth is expected at 16% YoY. Among mid-size PVBs, Federal/AU Bank has reported strong growth, led by retail/SBL. PSBs too have joined the growth bandwagon, with SBI and BOB to be the frontrunners.

NPAs to further trend down, aided by contained slippages/better recoveries and accelerating growth

The brokerage said, "For our coverage universe, we expect the overall GNPA ratio to decline by 29bps QoQ to 4.8% in Q2FY23, led by lower slippages (reflecting in the low EMI bounce rate at 22%), better recovery trends in retail and higher write-offs with banks sitting on excess provisions. That said, the SME sector remains vulnerable to macro-risks which could thus lead to higher stress-flow from the restructured pool. Within corporate, lumpy resolutions have been limited in Q2 (SBI sold off KSK Mahanadi exposure of Rs38bn to ARC), but there are visible signs of pick-up in resolution via NCLT/non-NCLT, mainly in the power & infra sector. The NARCL transfer for PSBs has been delayed yet again to Q3, while Yes Bank has advanced on transferring NPAs (Rs400bn) to the ARC. With most banks sitting on comfortable specific PCR and with some having strong contingent provision buffers, we believe incremental LLP would be contained and thus aid profitability.

Strong credit growth, better margins and lower LLP to boost profitability in Q2

The brokerage has said, "We believe better credit growth leading to higher LDR, asset repricing and lower interest reversals should be margin-positive for most banks, excluding select banks like Bandhan, AU SFB and Ujjivan SFB. With G-Sec yields largely remaining flat QoQ, MTM losses are expected to be limited for banks in Q2. That said, opex is likely to remain elevated, given that most banks are looking to expand their franchisee network amid the raging clamour for deposits/retail loans and investments in technology, thereby restricting PPoP growth at 18% YoY. However, continued deceleration in NPA provisions should lead to strong 40% YoY/16% QoQ profit growth for banks in our coverage universe. The outliers among large PVBs could be ICICI/Axis, with Federal/KVB/Equitas being the exceptions in small-/midcap banks. Among PSBs, SBI and Canara will remain outliers. We expect Bandhan (mainly on higher NPAs) and AU SFB (on a higher base) to report relatively subdued profitability."

Recent softness in stocks offers a good opportunity to buy

The brokerage said, "Banking stocks have recently corrected from their Q1 highs due to global spill-overs and macro concerns. However, we believe that though India's banking sector credit growth looks high, it is resurrecting from the decadal lows, mainly led by strong consumption demand. Corporate credit growth too is accelerating, led by improving working capital demand; increasing capacity utilization levels of >74-75% could trigger a new capex cycle in due course, unless inflation enters the run-away zone leading to sharp rate hikes and thus derailing the investment cycle. Moreover, asset quality is on the mend and the risk of a fresh NPA cycle remains low, leading to lower LLP and thus supporting strong profitability/return ratios for banks. Hence, we remain constructive on the banking sector. Among large private banks, we prefer ICICI/HDFCB/IIB, while among large PSBs, SBI remains our preferred pick. Within small-/mid-cap banks, we prefer FB, KVB and Canara Bank."

Top banking stocks - CMP, Target Price, Potential Upside

S.No	Stocks	CMP	Target Price	Potential Upside
1	Axis Bank	Rs 772.20	Rs 1,020	56.00%
2	HDFC Bank	Rs 1,418.40	Rs 1,800	27.00%
3	ICICI Bank	Rs 884.15	Rs 1,025	16.00%
4	IndusInd Bank	Rs 1,212.10	Rs 1,275	6.00%
5	Kotak Mahindra Bank	Rs 1,809.90	Rs 2,230	24.00%
6	City Union Bank	Rs 178.75	Rs 200	12.00%
7	Federal Bank	Rs 120.75	Rs 147	22.00%
8	Karur Vysya Bank	Rs 83.60	Rs 95	14.00%
9	Equitas SFB	Rs 50.15	Rs 62	24.00%
10	Bank Of Baroda	Rs 132.50	Rs 140	7.00%
11	Canara Bank	Rs 227.80	Rs 282	24.00%
12	Indian Bank	Rs 199	Rs 203	2.00%
13	State Bank Of India	Rs 530.40	Rs 640	21.00%

Note - Current Market Price (CMP) on NSE at the time of writing

Emkay Global's Comments on the stocks

1. Axis Bank

Healthy profitability on a lower base led by better growth, margins and contained credit cost, partly offset by higher opex. Bank is unlikely to reverse Covid-contingent provisions. Slippages to remain elevated, but better recoveries should drive down NPAs. 

2. HDFC Bank

Bank to report healthy profitability led by better growth and contained credit cost, but margin/fees may remain soft. Slippages to moderate qoq with seasonal agri stress easing

3. ICICI Bank

Better growth, including for mortgages and unsecured loans, should drive up margins, leading to healthy core profitability. Slippages to moderate QoQ, with retail stress receding.

4. IndusInd Bank

Bank to report healthy growth, with improving growth trajectory in CV/MFI, which should support margins. Slippages to moderate a bit QoQ, as stress formation in CV, MFI eases.

5. Kotak Mahindra Bank

Strong growth aided by mortgages/corporate; NIMs to remain flattish due to SA rate hike impact.
Slippages to moderate QoQ, as the last quarter witnessed the impact of change in RBI norms.

6. City Union Bank

Weak treasury and elevated LLP could keep profits in check. Slippages could remain elevated with some relapse from the restructured book. Spice Jet remains standard due to a court ruling.

7. Federal Bank

Better growth, margins and contained LLP to help the bank deliver 1%+ RoA. Slippages would remain flat QoQ.

8. Karur Vysya Bank

Better growth/margins to help operating profitability. This coupled with contained LLP to drive up profitability. Slippages could inch up QoQ, from a low base due to NPAs in the SME/restructured pool.

9. Equitas SFB

Higher LLP and lower PSLC fees would weigh on profitability, which optically looks higher due to the lower base. Slippages would remain elevated due to stress in the VF and MFI restructured portfolio.

10. Bank Of Baroda

Healthy growth and margins would support profitability. Slippages would remain largely flat QoQ, but better recoveries/w-offs would drive down NPAs.

11. Canara Bank

Healthy growth, margins and better treasury management would support profitability. Slippages would remain largely flat QoQ, but better recoveries/w-offs would drive down NPAs.

12. Indian Bank

Moderate growth and margins would keep profitability largely flat QoQ. Slippages would also remain largely flat QoQ.

13. State Bank Of India

Healthy growth, margin recovery and lower staff cost in the absence of impact of family pension would drive up profitability. Slippages would come off QoQ, while recovery from Q1 should lead to lower NPAs.

Disclaimer

The stocks have been picked from the brokerage report of Emkay Global. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.