Kotak Institutional Equities has released its latest outlook on Indian bank shares, identifying HDFC Bank and ICICI Bank as its top choices within the private sector. The financial firm notes that while asset quality trends remain favorable and the funding environment is supportive, current valuations already reflect much of the potential upside across the banking sector.
Top Picks: HDFC Bank and ICICI Bank
According to Kotak, HDFC Bank and ICICI Bank present compelling valuations, despite their recent market outperformance. The brokerage believes there is still scope for multiple expansion alongside steady earnings growth for these frontline private banks. Among public sector lenders, State Bank of India (SBI) remains Kotak's preferred exposure.
Axis Bank Faces Performance Scrutiny
In contrast to its top picks, Kotak Institutional Equities indicated that Axis Bank Ltd. needs to show significant improvement in its franchise performance relative to its peers to warrant a premium valuation. This suggests a higher bar for Axis Bank to justify its market standing.
Resilient Asset Quality and Sector Dynamics
Kotak projects that asset quality for Indian bank shares will remain resilient, bolstered by strong retail loan vintages and stable corporate balance sheets. Risks within the MSME (Micro, Small, and Medium Enterprises) sector are also considered contained due to ongoing policy support. Lower slippages from the retail loan portfolio are expected to offset any potential, unforeseen stress from the MSME segment. Overall, slippages are anticipated to hold steady in the short term, though the medium-term outlook will depend on how the economic cycle evolves.
The brokerage highlights that the banking sector is at an interesting phase, where a re-rating could be driven by disciplined yield management from public banks and enhanced access to lower-cost borrowings, particularly through foreign currency non-resident (FNCR) deposits. A recovery in net interest income (NII) growth and stability in slippages are identified as two critical factors for the sector's re-rating.
NII Pressure and Loan Growth
Kotak observes that recent earnings corrections have largely reflected pressure on NII rather than a deterioration in asset quality metrics. The primary factor impacting NII has been slower deposit growth, leading to higher borrowing costs for banks. Despite these NII pressures, loan growth continues to exceed current expectations, indicating robust demand for credit within the economy.
"Valuations remain attractive despite recent outperformance, with scope for multiple expansion and earnings compounding. We have a relative preference for frontline private banks alongside SBI among public sector lenders," Kotak stated in its report.