Brokerage houses have been betting on select banks, especially after the beginning of improvement in their asset quality and hope of further earnings growth.
Elara is one of the brokerage houses that also turned positive on banks and expects better days ahead for lenders.
"We expect banks' profitability to improve after a long hiatus based on a few factors: 1) traction in credit expansion pace, 2) much better loan pricing power considering weak financial condition of key competitor (NBFC), 3) a fall in G-Sec yield, and 4) improvement in NPL recoveries by up-gradation of Jayaswal Neco, Binani Cements and Uttam Galva loan accounts," Elara said.
It believes higher credit growth would reflect into banks' market share gain and loan pricing power would enhance margin. "A fall in G-Sec yield would result in higher capital gains and write-back of MTM depreciation on fixed-income papers."
The absence of chunky corporate loan slippages and NPL recoveries in NCLT/IBC cases apart from other recoveries would lead to a rise in provisions buffer and adjusted book value, it said.
Post IL&FS debacle, NBFCs' resources mobilisation and pace of lending have undergone major adjustments. Although large banks are equipped with excess SLR (statutory liquidity ratio) and core capital, lending to NBFCs was limited. Banks opened tap only after RBI and government intervention.
As a result of this, Elara said credit demand has shifted to banks with much better pricing power. "This will eventually translate into higher margin for the banks."
The research house does not expect any new large corporate loan account to slip barring re-classification of IL&FS.
It said a sharp fall of 65bp (to 7.37 percent) in 10-year benchmark G-sec in Q3FY19 QoQ would lead to a sizable capital gain and investment depreciation write-back. It expects investment depreciation write-back at 30-35 percent of average PPOP (pre-provision operating profit) in Q1 and Q2.
Elara feels among the large PSBs, SBI would be an outlier in terms of outperformance and among mid-sized PSBs, Syndicate Bank would be an outlier. Their MTM write-backs would be at 52 percent and around 110 percent of their average PPOP. Treasury gains would also improve substantially, it said.
Hence, considering these factors, the research house prefers banks with high core capital to take advantage of traction in credit demand and higher low-cost deposit to contain funding cost and remain competitive in loan pricing.
Overall, it prefers ICICI Bank (Accumulate - Target Rs 363), Axis Bank (Accumulate - Target Rs 648) and SBI (Accumulate - Target Rs 323) among corporate banks and Karur Vysya Bank (Buy - Target Rs 111) and City Union Bank (Buy - Target Rs 212) among mid-sized regional banks.Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol advises users to check with certified experts before taking any investment decisions.