Banks and diversified financials look ‘attractive’: Kotak Equities

Kotak Institutional Equities

Kotak Equities has given an ‘attractive’ rating to the banking and diversified financial sector post the recently concluded strong quarter.

“A solid end to the year with the quarter showing strong all-round performance in loan growth at 15 percent YoY, net interest margin (NIM) expanded for a few players, led by higher lending yields, lower concerns from treasury income and provisions declined steadily with further improvement in asset quality. Return on Equity (RoE) are moving closer to what we believe are closer to normalised levels. However, we do believe that FY2024 will be challenging for earnings growth. NBFCs reported a strong performance on all counts,” the brokerage firm noted.

Impressive performance overall

The overall performance was found to be impressive with both private and public sector banks participating. “Banks under coverage delivered healthy earnings growth (~22 percent YoY, lower due to the loss reported by Axis Bank), aided by operating profit growth. We saw healthy loan growth of ~15 percent, with broad participation from both private and public banks,” it further said.

"NIM expansion was not uniform with a few banks reporting declines due to a sharp increase in cost of funds, but these NIM are still closer to their all-time highs. Asset quality improved further, with gross NPLs at a decade low. RoE is reaching closer to the long-term averages for large banks,” stated the brokerage firm.

Normalisation begins for NIM while credit cost likely to remain low

The key discussion as per the brokerage house remains with investors on loan growth and NIM progression from hereon. The firm had fewer concerns emerging from the large corporate house that went under stress in the previous quarter as the group deleveraged itself in the quarter.

“We are starting to see signs of a moderation in loan growth, but the breadth still appears to be comfortable,” it said.

“We do believe NIM would be under pressure in FY2024. Cost of funds transmission is still not complete, while lending yields have limited room for improvement unless the book has a higher share of MCLR. Operating profit growth will be under stress, but lower credit costs (assuming there is no higher provision for ECL) should ensure RoEs improve further from current levels.”

Non-banks: Strong on all counts

NBFCs reported a strong performance in 4QFY23 on all counts. High QoQ loan growth was a combination of strong macro and seasonal year-end strength. NIM compression QoQ was marginal despite rising rates. Asset-quality performance, including early warning indicators (EWI), across NBFCs were strong as per the brokerage house.

“Most NBFCs continue to guide for buoyancy to continue in FY2024E, with no red flags until now. While we remain bullish on the sector, rich valuations post recent run up, moderate our stance. Among the larger ones, we find some value in Shriram; affordable housing remains favored theme.”

Keeping an unchanged investment thesis

“We continue to favor tier-2 banks over tier-1 banks. We believe that the lower credit costs and further improvement in return ratios would give greater comfort to re-rate these banks higher than current levels. We do not see ECL provisions to be a de-rating event as well, as it only strengthens their balance sheet. Among tier-1 banks, we like SBI, Axis Bank and ICICI Bank.”

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