The Nifty Private Bank index has lost over half a percent in 2024 YTD as against a massive over 15 percent surge in the Nifty PSU Bank index. In comparison, the benchmark Nifty Bank lost around 4 percent mainly dragged by heavy-weight private banks. Experts also believe that PSU banks are better placed than private banks currently and that private banks are likely to see some more consolidation in the near term.
“Banks will choose better yield retail lending over tightly priced corporate loans to utilize the available liquidity at an optimum level. We believe RoA for private banks has peaked out, resulting in a consolidation phase for stock prices, which should stay till spread expansion materializes,” said InCred Equities in a report.
Amid this environment, brokerages have suggested 3 private sector banks you can buy with up to 47 percent potential upside. Let’s take a look.
Centrum Broking on RBL Bank: The brokerage has a ‘buy’ call on the stock with a target price of ₹331, indicating a 47 percent potential upside.
As per the brokerage, RBL Bank is emerging from a risk-off phase that resulted in stagnant growth from FY20 to FY23, with advances showing a compound annual growth rate (CAGR) of 6.6%. However, in FY23 and 1QFY24, the bank demonstrated a notable turnaround, achieving 17% and 21% year-on-year advance growth, respectively. This shift is attributed to the retailisation of both assets and liabilities. On the asset side, RBL has expanded its retail product offerings, leading to robust growth in its retail portfolio, which now constitutes 55% of advances, with a year-on-year growth of 21% in FY23 and 34% in 1QFY24.
The bank has also enhanced its asset quality, with gross non-performing assets (GNPA) and net non-performing assets (NNPA) ratios decreasing to 3.2% and 1.0%, respectively, as of 1QFY24. Overall, RBL Bank has effectively addressed investor concerns regarding corporate governance, liability franchise, and growth prospects, positioning itself for future growth and stability, it said.
“In terms of growth, we see clarity emerging on most fronts for RBL and also a scope for positive surprises going forward. We bake in strong numbers in advances, NII, and PAT, with a CAGR of 23%, 26%, and 36%, respectively over FY23-26E. We believe that RBL is well-positioned to deliver average RoAA and RoAE of 1.1% and 12% over FY24-26E. Current valuations (0.8x PB, 7x PE – 1HFY26) offer enough margin of safety. Importantly, the long EPS downgrade cycle (which started in FY20) is finally bottoming out in our view. Looking forward to FY24-26E, RBL will likely see the best earnings momentum in the sector with 36% EPS CAGR,” explained the brokerage.
BP Wealth on IndusInd Bank: The brokerage has a ‘buy’ call on the private sector lender with a target price of ₹1,950, implying an upside of 32 percent with a 12-month investment horizon.
As per the brokerage, IndusInd Bank, with its substantial share of high-yielding and fixed-rate loans, stands to reap significant benefits as the interest rate cut cycle is anticipated to begin, likely in the second half of FY25. This strategic positioning positions IndusInd Bank as an attractive investment opportunity for those seeking exposure to India’s robust economic expansion. Notably, the bank’s promoters’ expressed intent to raise their stake from 15% to 26%, pending RBI approval, provides considerable reassurance to investors, it added.
The brokerage further pointed out that currently trading at an appealing valuation of 1.4 times the estimated FY26 book value of Rs. 1,080 and a P/E ratio of just 9.1 times the estimated FY26 EPS of Rs. 170, with an impressive earning compound annual growth rate (CAGR) of 21%, IndusInd Bank offers compelling investment potential. The resulting PEG ratio of 0.4 times, coupled with the expected rise in return on assets (ROA) to 2% by FY26, further enhances its attractiveness relative to peers. Additionally, with a projected return on equity (ROE) of 17% while maintaining a modest price-to-book value of 1.4 times, IndusInd Bank stands out among its counterparts. Moreover, the management’s indication of potential Opex-led ROA leverage as operational scale increases and technology investments grow at a slower pace adds to the bank’s appeal, added BP.
BOBCAPS Research on IDFC First Bank: The brokerage has a ‘buy’ call on the lender with a target price of ₹96, implying an upside of over 22 percent. Better operational efficiencies would be key to improving ROA/ROE (1.4%/14% in FY26E). “Considering sustainable growth and stable asset quality, we assume coverage with BUY,” said the brokerage.
Since it merged with IDFC, IDFCFirst Bank delivered strong business growth (moving from institutional lending to retail business) with a focus on reducing high-cost funds to improve margins. Baking in IDFCBK’s track record and industry dynamics, the brokerage assumes a credit/deposit CAGR of 24%/31% over FY23-FY26. It expects strategic growth in the loan book to be driven by the SME and retail portfolios, likely aiding NIM. Along with strong deposit growth, IDFCBK has a healthy CASA ratio of 47% in Q3FY24 (the highest among peers) which also supports NIM, added the brokerage. It also estimates IDFC First Bank’s asset quality to remain stable with a GNPA/NNPA of 2.1%/0.7% over FY26 with a PCR of 69%.
“IDFC First Bank is a turnaround story post Covid-19, with its business dynamics and asset quality improving substantially, as partly reflected in the valuation rerating over the past one year. Thus, factoring in robust business growth, stable margins and healthy asset quality, we believe the bank has further potential to improve its return metrics. We believe the bank’s strategic approach to becoming IDFC 2.0 will augur well for it, though improving operational efficiencies would be key,” said the brokerage.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.
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Published: 15 Mar 2024, 01:40 PM IST