HDFC Bank, ICICI Bank, SBI among top banking picks as analysts say most negatives already priced in

Most analysts are positive about the prospects of banking stocks as they believe their valuations are reasonable while the asset quality and loan growth of major banks remain strong.

While the earning growth of banks is slowing down due to margin pressure and higher operational expenditure, it remains healthy thanks to strong loan growth and asset quality.

According to Rahul Malani, a research analyst at Sharekhan by BNP Paribas, tight liquidity conditions are creating a challenge for the banks to mobilise deposits. Additionally, a higher credit-deposit ratio is also creating a challenge to sustain loan growth at healthy levels.

However, most negatives could be priced in for the banking stocks.

There is no demand-side constraint for the loan growth. Thus, the focus is more on deposit growth as it would have a bearing impact on loan growth and NIMs (net interest margins) in the coming quarter, Malani observed.

Notably, banks' asset quality outlook remains stable despite concerns raised on the unsecured segment.

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Malani believes the return ratios of banks are unlikely to reverse meaningfully in the near to medium term.

Malani expects a gradual credit cost normalisation but its impact could be manageable unless there is a sharp macroeconomic downturn. Moreover, additional contingent provision buffers, a higher PCR, higher capital buffers, and lower stressed assets augur well for the banking sector’s outlook.

"Valuations are reasonable versus the sustainable RoE (return on equity) trajectory over nearly 15 per cent in the near to medium term. Top preferred picks are ICICI Bank and Axis Bank among large private banks and IndusInd Bank and Federal Bank among mid-tier private banks. Within public sector banks, SBI, Bank of India and PNB remain our top preferred picks," said Malani.

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Here are four largecap banking stocks that several analysts recommend to buy. Take a look:

Jignesh Shial, Director - Research, Head of BFSI Sector at InCred Capital

HDFC Bank sharply corrected nearly 17 per cent in 2024 due to looming concerns about further NIM pressure given the upcoming re-funding of HDFC Ltd’s borrowings. 

However, we believe that elevated cost of deposits and NIM pressure would be a common problem for all banks in the near term and that HDFC Bank is better placed due to its improved penetration providing portfolio granularity and a command over loan pricing. 

It is available at nearly 1.9 times FY25F BV (book value) (nearly 30 per cent discount to its long-term mean) on a standalone basis, which provides an attractive risk-reward ratio. 

HDFC Bank is our high-conviction 'add' stock with a target price of ₹2,000, valuing the standalone bank at nearly 2.7 times FY25F BV and its subsidiaries at ₹200. 

Slow growth and weak margins are key downside risks.

Santosh Meena, Head of Research, Swastika Investmart

State Bank of India (SBI) is a key indicator of India's economic health and infrastructure investment. 

The bank boasts impressive loan growth while maintaining stable asset quality. 

Despite recent gains, its valuation remains attractive, trading below two times the price-to-book-value ratio, which is lower than many other banks. 

Reflecting on historical trends, SBI witnessed a remarkable surge from 30 to 300 during the 2003–2007 bull market phase, following a decade of consolidation. 

Similarly, after a decade of consolidation, the recent breakout above the 300 level in 2021 suggests the potential for a significant upward movement akin to the 2003–2007 period. 

During its peak valuation in the previous bull run, SBI traded at a price-to-book value ratio of 3.5, indicating there is still considerable upside potential. 

The near-term target is ₹880 while the one-year target is at ₹1,100 with a stop loss of ₹700.

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Vijay Gour, Analyst - BFSI, Choice Broking

IndusInd Bank is expected to report strong credit and deposit growth in FY24 and FY25, while net interest margin (NIM) would stay slightly higher than FY23 levels. 

Gross NPA is expected to go down from 2 per cent in FY23 to 1.8 per cent in FY24. 

In terms of return ratios, RoE (return on equity) and RoA (return on assets) are expected to stay healthy at 15.6 per cent and 1.8 per cent, respectively, for FY24 and 16.8 per cent and 2 per cent, respectively, for FY25.

ICICI Bank is likely to register strong credit growth in FY24 and FY25, while deposit growth would be in line with credit growth. 

Asset quality has significantly improved in the last couple of years. Improvement in asset quality would lead to lower credit costs going forward. 

Return ratios (RoE and RoA) are expected to improve from FY23 levels for the bank.

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Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decisions.