SBI, ICICI Bank, Axis Bank: Kotak’s Top picks in Banking Sector

SBI, ICICI Bank, Axis Bank: Central Banks, across the world and especially in developed markets, have provided greater insights into wider topics as the Covid situation unfolded. The research publications cover wide topics giving insights into savings, leverage, payments, corporate, MSME or retail and the impact of Covid. Kotak Institutional Equities have had to rely extensively on small sample size channel checks or discussions with the management. Kotak has had challenges forecasting asset quality or earnings in the past. In their view, volatility to stock prices gains more than desired with such an approach.

There are a lot of unanswered questions on the recovery though we note a sharp change in investors’ outlook on Indian financials. Lack of hard data on Covid implies that Kotak is relying on small sample size channel checks or management feedback. Price performance shows diverging trends but with few stocks back to preCovid levels, there is headroom available if this recovery trend continues. A more flexible approach is desired with emphasis on large caps.

Feedback from channel checks confirms that large corporations could show resilience against this slowdown. The first leg of the impact has been absorbed by the guarantee scheme but Kotak would be careful to extrapolate this recovery and get to a more risky portfolio should there be another leg to this slowdown in FY2022. Kotak top pick remains with ICICI Bank, Axis Bank (large caps), SBI (public banks) and Federal Bank (mid-cap banks) and DCB (small banks).

The price action that we see on various stocks exhibits quite diverging themes but two dominate them all:

(1) flight to large private banks as Kotak sees with HDFC Bank which is trading above its pre-Covid highs and ICICI Bank moving closer to its pre-Covid levels
(2) On the other hand, we see a flight to comfort as well

The following aspects of the market are still a concern:

See Zee Business Live TV Streaming Below:

(1) spreads (maturity or credit spreads) are still at very high levels suggesting that banks are still uncomfortable to lend
(2) loan growth is still quite sluggish which probably suggests positive commentary is coming from very few participants while the sector is still not ready to lend
(3) after the initial surge, the net deposit addition is tracking FY2020 suggesting that the net impact has been lower
(4) Commentary on collection efficiency, like moratorium, does not give us any insights and hence makes it harder to differentiate and establish credit costs.