Analyst Tracker: Banking, finance stocks continue to be analysts’ darlings

Brokerage analysts are bullish on the banking sector, with 5 of these stocks in the list of top 10 with maximum 'buy' calls.

Banking and finance counters are the stars of Moneycontrol Analyst Call Tracker for March, with five companies from the sector, part of the top 10 Nifty 50 companies, boasting most "buy" calls.

Two finance companies — the Bajaj twins — also featured in the list of 10 companies that bagged maximum analyst upgrades in the previous fiscal.

In FY24, the Nifty PSU bank index saw remarkable returns of 88.6 percent, overshadowing the Nifty private bank index, which grew at a moderate 14 percent. The sharp underperformance of private banks such as HDFC Bank, which has the highest weightage in the banking index, pulled down the overall sector return, with the Bank Nifty index delivering gains of 16.05 percent. In comparison, the Nifty50 surged 29 percent through the year.

Banking stocks dominated the list of top 10 Nifty 50 stocks with maximum 'buy' calls in March.

Banks credit growth remains strong, with personal loans outpacing other sectors.

“Over the last two years, there has been a pick-up in economic growth and banks have witnessed credit growth at a Compound Annual Growth Rate (CAGR) of 18.2 percent from March 2022 to December 2023,” said CareEdge Ratings in a recent note. Not only this, the advances continued to grow at 19.9 percent on-year during 9MFY24 (April-December).

“The growth was largely driven by personal loans followed by the services sector,” CareEdge said in the note. Provisional figures show the credit trend remained healthy in the fiscal fourth quarter too, with 15-25 percent on-year growth.

The systemic credit growth, encompassing all financing channels in addition to banks, also remained at healthy levels despite the Reserve Bank of India (RBI) persisting with its tight liquidity stance over the past few months, said JM Financial. This reflects underlying demand buoyancy in the environment.

An improvement in asset quality and decline in credit cost is also resulting in improved profitability for banks.

Valuation comfortable but banks’ growth hinges on low-cost deposits

Sector valuations remain comfortable, said JM Financial. In fiscal year 2024-25, for private banks, deposit growth will dictate their overall growth and stock performance, the brokerage firm added.

The funding gap remains wide, with deposit growth lagging credit, Elara Securities said in a recent note. “While there is still some leeway in terms of liquidity and excess SLR for sustainable growth without diluting funding mix, deposit growth uptick is key,” it added.

Given that the RBI has raised concerns about high credit-deposit ratios, PSU banks will be better off than private banks as they operate at 70-75 percent levels compared to 85-90 percent for private banks, the Elara note said.

Private banks outpace PSU banks in credit growth

ICICI Bank tops the stocks with maximum "buy" calls. It has 49 "buy" calls, three "holds" and no "sell" calls — the same as a month ago. The banking stock had 50 "buy" and two "holds"a year ago.

ICICI Bank has been delivering a steady loan CAGR of 18 percent over FY 2021-24(E) and has industry leading return on assets (RoA). “We note that ICICI Bank is well positioned in terms of its liability (deposit) profile with a healthy mix of CASA and retail. Additionally, the domestic credit-deposit ratio for the bank also remains in control at around 85 percent,” said Motilal Oswal in a recent research note.

ICICI Bank will also benefit from operating leverage and grow its business on the back of strong technological investments, Motilal Oswal said.

The largest private sector lender HDFC Bank is next on the list with 45 "buys", five "holds"  and no "sell" calls — unchanged from the previous month. But the coverage has significantly increased over a year, from 39 "buy" calls and three "hold" calls.

HDFC Bank is the biggest beneficiary of easing in liquidity, which has begun improving of late, JM Financial said.

Elara Securities expects HDFC Bank to report strong deposit growth in the upcoming quarters but it said it would monitor the composition in the form of retail and others. HDFC Bank is also likely to post a steady net interest margin (NIM) and strong asset quality.

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