Banking stocks were showstopper on Tuesday’s trading session. Both Sensex and Nifty were stirred with investors making buyings in major lenders. At around 1320 hours, the S&P Bankex was trading at 34,323.64 higher by a whopping 512.59 points or 1.52%. At the same time, Nifty Bank was performing at 30,480.60 up by 376.35 points or 1.25%. On these indexes, the top performers list was led by IndusInd Bank, ICICI Bank, RBL Bank, Axis Bank, Federal Bank, Kotak Mahindra Bank, HDFC Bank, Yes Bank and SBI rising in the range of 0.06% to over 3.30%.
According to research note of American investment banker Goldman Sachs, our India banks coverage has rallied by c.12% over the last 3 months with SOE banks/NBFCs outperforming Bank Nifty (up 9%), which we believe was partly driven by easing liquidity conditions and no negative developments within the NBFC space.
Goldman highlights that, while liquidity and NPL risks seem to have dissipated for now, we remain selective and focus on stocks with strong operational outlook. Hence, if you are planning to buy any bank and NBCF stock, then here’s what Goldman Sachs reveals. The banker has also given investment calls on PSBs, NBFCs and private banks. Let’s find out!
SOE Banks have rallied by c.25% since mid-Feb following rate cuts by the RBI and the positive momentum on NPL resolution. One of the key investor questions has been whether SOE valuations can continue to re-rate and if the current cycle can play out the way it did in 2003-2007. Goldman believes that, SOE banks will be one of the key beneficiaries of moderating credit costs as recovery picks up pace. However, we argue that ROAs have settled for lower with an acceleration in market share loss in lending/deposits.
With valuations having re-rated for select SOE banks, prefer SBI (Buy) and downgrade PNB to Sell from Neutral on valuations and low capital adequacy/exposure to agri/SME.
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Within private banks, apart from credit costs, the focus would shift to operational performance, strength of liability franchise and geographical footprint. Goldman prefers, names with either low valuations coupled with improving operational performance or strong retail franchise such as Buy-rated HDBK (on CL) within our coverage.
While ICBK has seen strong credit cost recovery, according to Goldman, expect loan growth recovery, strong liability franchise and productivity improvement to drive c.20% PPOP CAGR over FY19-21E, we add ICBK to the Conviction List with our new 12m TP of Rs492 implying a 13.5X FY20 P/E / 2.1X FY20 P/B.
Also, the US-based banker has downgraded IDFB to Sell from Neutral on valuation and execution/credit cost risks.
Even with the funding situation normalized, NBFCs have been structurally settling for lower ROA/ROEs due to lower leverage and higher liquidity/tighter ALMs. While funding costs for AAA-rated borrowers have declined, the credit spreads for AAA vs. AA rated borrowers have expanded.
“ We prefer NBFCs with the ability to defend profitability and sustain healthy growth with comfortable valuations as regulatory uncertainty prevails; Prefer HDFC (Buy), downgrade LICH to Sell from Neutral on valuations and profitability outlook,” says Goldman.