SBI and HDFC Bank share prices: HSBC prefers these 2 banks, with strong liability franchise and robust capital buffer

SBI and HDFC Bank share prices: HSBC says in Q3 FY21, bank credit growth remained muted at 5-6% yoy. However, as the economy gradually started unlocking, banks saw credit growth recovering. Sales trends in housing, passenger vehicles and consumer durables have witnessed steady improvement. Deposit growth (at 11% yoy) has also remained robust despite the lower interest rates on offer. Movement in bank lending rates and deposit rates indicates stable NIMs. Fee income should improve sequentially on higher disbursements, but be partly offset by an increase in operating costs.

However, the key trend to watch for is asset quality performance. Since the timelines for RBI resolution period ended in December 2020, there will be a clear picture on the quantum of loans which are being restructured, are in SMA buckets or eventually or which will slip into NPA.

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HDFC Bank Share price

HSBC believes large banks, thanks to their superior distribution, stronger balance sheets and lower cost of funds, will accelerate their market share gains over more vulnerable lenders. HDFC Bank in particular is further advantaged by its continued investment in distribution; lower cost of operations and funds; and clean underwriting track record. While Kotak Mahindra Bank is strong on asset quality and cost of funds and their intent to grow looks encouraging, its structurally high opex would drag RoE below 15%.

SBI share price

SBI’s valuation discount is not justified by past asset quality performance and even the near-term outlook. SBI’s strong balance sheet position (healthy provisions, high liquidity, strong liability franchise and low capital consumption) should help the bank navigate in an uncertain climate. Our revised target price of Rs 350 (from Rs 285) values the bank at 1.2x FY22e consolidated BV (0.7x FY22e standalone BV).
On the back of lower credit costs, higher growth and marginal improvement in margins estimates, our FY21-23e EPS for most banks have increased. Earnings change looks on the higher side as the sensitivity to credit cost is higher, especially for small PSU banks. Moreover, we believe that with visibility improving on growth and recent news around COVID-19 vaccinations, there are expectations of improvement in the credit environment.

HSBC expects that the banks generating robust PPOP, having high capital adequacy ratios, gaining market share in loans/deposits are better placed to absorb the stress in the system. With stock valuations underperforming the broader index (NIFTY), HSBC believes that this situation will lead to valuation re-rating for the leading banking stocks. HSBC, therefore, increased their implied valuation multiples for large banks.