Tag: Induslnd Bank

The debate in Indian banks has quickly shifted from impaired loans to growth. Stocks have done well over the past week to three months and are likely pricing in some growth recovery. Growth momentum is strong, and it is believed that the next leg of returns will be driven by valuation re-rating to much above-average valuations.

According to the report, the balance sheets at large private banks are among the strongest ever post any crisis with strong capital ratios with high non-specific loan provisions and significant liquidity. Loan growth has surprised positively with 70% incremental market share during F9M21. As the economy improves, it is expected to see significant earnings acceleration.

Morgan Stanley raises price targets to factor in 10-15% above-mean valuations at HDFC Bank and Axis Bank. ICICI’s valuation is well above mean levels given significantly higher profitability compared to past levels. A combination of valuation re-rating and strong earnings compounding drives 30-40% upside for the group.

“Our top picks are ICICI, HDFC Bank and Axis Bank. IndusInd Bank should also benefit from the cyclical tailwinds. The questions that we are being asked include why buy the Indian Financial stocks incrementally and can the stocks continue to do well: We believe this cycle is likely to be similar to the one in the early 2000s. Balance sheets at private banks are the best ever in terms of capital, provisions and liquidity. This will help them gain market share at an accelerated pace” said the report.

Profitability is high, helped by strong improvement in loan spreads in recent years as well as lower tax rates. Consequently, return ratios are also expected to reach or cross previous cycle peaks. With strong digital capabilities, and given the different evolution and regulatory dynamics in Large Indian private banks, it is believed that the risks are manageable.

Asset quality trends have surprised positively at large private banks
Indian Private Banks are exiting the cycle with strong excess provisions and asset quality trends have been much better than expected. Impaired loan formation was expected to pick up as the moratorium ended in August,2020 and restructuring window for corporate and retail loans ended in December, 20.

However, the trends surprised positively – impaired loan formation was 1.8-2.4% in F9M21 Vs 1.7-3.4% in F9M20. While unsecured retail and CV NPL formations have been high, corporate asset quality and secured retail have surprised positively with the stress largely being in disproportionately affected segments CVs, MFI, real estate, travel,etc.

Digital adoption has picked up sharply; will continue to improve:
Large private banks have done well on digitization and have improved significantly. Product offerings, where delivery and convenience can match better than that of the fintechs, this has helped them tie up with new players efficiently. Distribution capabilities have improved whereas speed, accessibility and cost of delivery has reduced.

Underwriting practices with new datasets are now originating because of which the ability to underwrite has improved and costs have lowered since.