Banks' valuations look reasonable, 2024's credit growth to be around 15%: Jefferies

Capital raising may only be need to be done by select banks despite credit growth and capital consumption from higher risk weight on personal and NBFC loans, according to Jefferies' analysts.

Valuations of bank stocks look reasonable with their price rise lagging that of the market and emerging-market financials in 2023, said Jefferies in their latest report on the sector.

"In 2023, Nifty banks rose 12 percent, lagging market & EM financials, despite healthy RoE. So, valuations look reasonable," the brokerage's analysts wrote.

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"With performance gap between private & PSU banks narrowing, range of valuations should also narrow," they added. The brokerage rated Axis Bank, IndusInd Bank, ICICI Bank and HDFC Bank as 'buys' among private banks and SBI as a 'buy' among public-sector banks (PSBs).

In 2024, they see credit growth through personal loans to see a "tad softer" rise because the Reserve Bank of India has asked banks to go slow on this segment. But with credit growth being more broad-based — coming from small and medium enterprises, housing and an uptick in capex — it could touch around 15 percent.

"Indian bank credit is growing at 16 percent, faster than the GDP growth of 9 percent, implying a credit multiplier of 1.7x. This is being aided by stronger growth in consumer loans, a ramp-up of segments like SME, inflation-led growth in working capital credit and some uptick in capex activity," they wrote.

The analysts note that banks have been shy of financing corporate capex projects because of concerns about large-ticket exposures and previous risks. Banks will need to identify segments or categories where they can participate over the next one to two years, they added.

The report also discussed the other themes that will play out for the banking stocks over 2024.

One is the banks fighting for deposits with the central bank keeping liquidity tight and credit growth staying strong. Easing inflation could ease liquidity, the analysts added.

Another is banks using cost controls to support pre-provision operating profit (PPOP).

"As margin levers recede, banks will start to slow cost growth, especially as they up-fronted investments. We see opex growth slowing from 23 percent in FY24 (Pvt bks) to 13 percent in FY25," according to the analysts.

While PSU banks will need to bear the one-time expense of a wage hike in 2HFY24, the low-base effect will help their PPOP growth, the analysts added.

Asset quality of the banks has fared well, wrote the analysts, and therefore they may not see a sharp rise in credit costs. The brokerage's estimates factor in the normalisation of credit costs from 0.5 percent of loans in 1HFY24 to 0.6 percent in FY25 and 0.7 percent in FY26.

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Capital raising may only need to be done by select banks despite credit growth and capital consumption from higher risk weight on personal and NBFC loans. This is because most banks are well capitalised, wrote the analysts.

"Moreover, with all banks seeing ROEs in high teens, internal accruals are strong to support medium-term growth," they added.