Nomura says Indian banking sector on cusp of multi-year credit cycle; check analysts' top picks

The Indian banking sector is on the cusp of a multi-year credit cycle, global brokerage Nomura said in its latest report. The brokerage expects banks to deliver a 17 per cent return on equity (ROE) over FY24–25F, with an 18 per cent loan compound annual growth rate (CAGR) for private banks, Zee Business reported.

In its recent report, Motilal Oswal said that banks reported a strong 4QFY23, driven by healthy loan growth, stable margins, and continued asset quality improvements. There were numerous drivers of credit expansion, with the Retail and MSME sectors exhibiting robust growth and the corporate book displaying a healthy rebound. Deposit growth was supported by term deposits due to higher interest rates, which resulted in a sequential rise in funding costs across the sector, it said.

Going forward, the brokerage expects earnings to remain resilient, guided by robust traction in loan growth and a benign credit cost. However, a challenging macro environment could slow demand recovery, the domestic brokerage said. The asset quality outlook remained encouraging in Q4FY23, with moderation in slippages, a healthy provision coverage ratio (PCR), and contingent buffers driving benign trends in core credit costs, it added.

Motilal Oswal remains positive on Axis Bank, ICICI Bank, SBI, IndusInd Bank, and IDFC First Bank. Nomura's top picks are ICICI Bank, Axis Bank, and IndusInd Bank.

As regards ICICI Bank, the foreign brokerage has a "buy" rating on the stock with a target price of Rs 1,120. On Axis Bank, Nomura has a "buy" rating with a target price of Rs 1,160. Nomura has maintained a "buy" call on IndusInd Bank with a target price of Rs 1,600.

On the other hand, the brokerage downgraded AU Small Finance Bank to Reduce from Neutral with a target price of Rs 650.

Meanwhile, CLSA has downgraded IDFC First Bank from Buy to Underperform, but the target price has been raised to Rs 85 from Rs 80 earlier. In its rationale, the foreign brokerage said that the stock has been one of the best performers on a year-to-date (YTD) basis, and while the bank has a compelling growth story, the valuation at 1.8x 1-year forward price-to-book value (P/B) does not fully reflect the unfinished journey on ROE improvement.

How has Bank Nifty fared?

In the last three months, the Bank Nifty has risen 9.6 per cent, Trendlyne data show. The benchmark NSE Nifty50 index has also gained nearly 10 per cent during the period.