Leading domestic brokerage Emkay Global has announced a significant shift in its investment strategy, exiting all exposure to large private and public sector banks in its model portfolio. The firm attributes this move to what it perceives as overvaluation in large-cap bank stocks and a structural slowdown in their hyper-growth phase.
Emkay's Strategic Shift: Why Exit Large Banks?
According to Emkay, despite a multi-year de-rating, valuations for major banks remain above their fair-value zone. The brokerage suggests that most 'quality' banking names are pricing in a higher growth in book value per share than their actual return on equity (RoE) can sustain, given their high base and a general lack of risk appetite in the sector.
Valuations and Growth Concerns
Emkay Global expressed caution, stating that the market continues to extrapolate past hyper-growth for these large institutions, overlooking a structural downward shift in growth. The firm believes that re-rating potential now lies in franchises with a credible path to improving their return on assets (RoA), rendering historic valuation ranges largely irrelevant for larger players.
Rising Competition and Disintermediation
The brokerage highlighted a tougher structural reality masked by recent cyclical upturns. Competitive intensity is escalating on three fronts: larger banks are struggling to gain market share, disintermediation is occurring in the wholesale space via bond markets, and disruptions in payments, distribution, and unsecured lending are impacting long-term profitability. Consequently, the era of hyper-growth for private banks is largely over, with rich RoAs now under threat.
Views on Major Private Lenders
Emkay Global provided specific insights into several prominent private banks:
- ICICI Bank: Identified as the strongest in the sector, but with limited upside at 2.4 times book value.
- HDFC Bank and Axis Bank: Considered relatively underpriced, but require consistent growth delivery to offer meaningful stock upside.
- Kotak Mahindra Bank: Showing signs of growth, but viewed as overly conservative given its capital drag. Management changes also create an overhang.
- IndusInd Bank: Its turnaround is largely priced in at 1.3 times book value, making the risk-reward unattractive.
Betting on SMID Banks: RBL and YES Bank
In contrast to its cautious stance on large banks, Emkay Global sees significant opportunity in smaller private banks (SMID banks). The firm has cut its overall financials exposure from 29% to 25%, with zero exposure to large-cap and PSU banks, preferring to play the credit cycle recovery through SMID banks and Non-Banking Financial Companies (NBFCs).
Capital Inflow and Management Changes
Emkay noted that foreign direct investment (FDI) and strategic capital inflows into banks like IDFC First Bank, Federal Bank, RBL Bank, and YES Bank are major positives. These investments provide a solid capital base, ease future capital anxiety, and signal confidence in their franchise-building potential. Specifically for RBL Bank and YES Bank, Emkay anticipates positive management changes focused on technology, systems, HR, and compliance.
These developments are expected to enable RBL and YES Bank to accelerate market-share gains and deliver sustained high growth, especially as the operating environment is projected to strengthen over FY27-28. Emkay considers these stocks as 'growth beta' that could significantly outperform the sector in the upcoming growth upcycle, potentially delivering 20% sustained growth over the next 2-3 years. The brokerage also expects their deposit profiles to improve as their franchises deepen, aided by an easy liquidity regime.
Public Sector Banks and Overall Portfolio Adjustments
Emkay Global maintains a zero-weight position in the public sector bank segment. While State Bank of India (SBI) remains its favored PSB due to its franchise strength and aggressive post-Covid execution, Emkay feels the stock is fully valued at 1.6 times book value, with an implied exit multiple for a 20% return being overly optimistic.
Beyond banking, Emkay has adjusted its NBFC exposure from SHFL to MMFS, seeing stronger re-rating potential. In Asset Management Companies (AMCs), it switched from ICICIAMC to ABSLAMC for higher beta exposure, aligning with its positive market outlook. The brokerage also added Godrej Consumer to its model portfolio.