Kotak maintains positive outlook on banks despite growing uncertainties

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Kotak Institutional Equities has maintained a positive outlook on the banking sector despite growing uncertainties and recognised the potential risks associated with a global economic slowdown. However, the brokerage firm is confident that Indian banks will perform comparatively well during this phase.

Indian banking stocks have witnessed correction recently amid concerns like deceleration of loan growth, the contraction cycle of net interest margin (NIM), weak operating profit growth, and potential risks to asset quality, Kotak said in its recent report to the investors.

"These concerns have been the main factor contributing to the weak price performance.  A significant challenge we face is the difficulty in reconciling the effects of rising interest rates, as there is a debate between the worsening asset quality and weakening loan growth. We, however, give greater importance to the latter, while investors are beginning to consider the former as well", the brokerage added.

Kotak takes a cautious approach towards loan growth in the absence of a corresponding change in income/earnings levels to reflect the impact of changes in interest rates. This is due to the non-linear response of consumers to interest rates, where they tend to delay credit decisions to avoid potential risks.

The underlying premise is that there is no challenge regarding asset quality, as there is no evidence of excessive credit buildup in any specific sector. Moreover, the recovery environment still appears favorable, as there has been no asset price deflation. This implies that the secured lending portfolio (such as MSME or retail loans) should be able to handle a mild slowdown, if any, with ease, Kotak report said.

Kotak's long-term perspective on large banks remains unchanged, with a favorable view of SBI, ICICI Bank, and Axis Bank. In addition, they see potential in certain mid-cap stocks.