How will HDFC Bank, Axis Bank, SBI and others perform in 2024? 5 key trends that will determine banks' performance

After an over 12 percent rise in Nifty Bank, brokerage house Bernstein expects the positive operating environment for banks to continue this year and remains bullish on the sector.

"The relative performance of the banks would be influenced by five key trends— a revival in corporate credit, potential rate cuts, a potential slowdown in unsecured consumer credit, divergence in deposit growth rates and normalisation of credit costs/RoA," said the brokerage.

Considering the varying exposure of different banks to the above factors, the rank order for banks under its coverage is HDFC Bank> Axis Bank> ICICI Bank> SBI> Kotak Mahindra Bank. Amongst the payment businesses, it prefers Paytm over SBI Cards.

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HDFC remains its top pick with a Target Price of ₹2,200, indicating nearly 30 percent upside.

Key trends

Bernstein expects the favorable operating environment to continue for the banks with healthy credit growth, still benign credit costs (though not ultra-low levels seen in the recent past) and margins only declining marginally from the cyclical highs. The sector would see some decline in interest margins following a rate cut (if any) but the banks have sufficient buffers to minimise the earnings impact, it added.

In this environment, it believes there are 5 key trends that will drive divergence in banks’ performance:

A revival in corporate credit growth: The brokerage sees clear signs of a revival of growth in the corporate segment and this will favor the larger banks. Unlike consumer loans where all banks, big and small, got a fair share of the opportunity, corporate lending will be more concentrated with the top banks capturing a majority of the opportunity, said the brokerage.

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A shallow rate cut cycle: Bernstein sees a chance of shallow rate cuts towards the end of this calendar year (25-50 bps) and this could impact the margins of the banks while benefiting the NBFCs through lower cost of funds. The banks that saw the sharpest increase in margins during the rate hike phase in FY23 will see the sharpest falls in margins. However, the EPS impact would be marginal given the healthy buffers available for many of the larger banks, it added.

A potential slowdown in unsecured consumer credit: As per the brokerage, the concerns on asset quality in certain pockets of consumer lending and recent RBI regulations on risk weights will likely result in slower growth in the unsecured consumer lending segments impacting the overall growth and profitability of NBFCs and banks that were heavily reliant on this segment for incremental growth. Banks are relatively better positioned vs NBFCs/fintechs and within banks, the larger banks (HDFC/ICICI) are better positioned vs the smaller ones with higher exposure to unsecured consumer lending, it pointed out.

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Deposits drive greater differentiation: Improving incremental CASA ratios, the repricing of term deposits, revival of growth in lower yield segments (corporate/mortgages vs. unsecured retail), and increased loan deposit ratios would make the benefits of a stronger deposit franchise more visible, stated the brokerage.

Normalisation of credit costs and RoAs: With the quantum of recoveries likely to decline from a cyclical high, the credit costs are likely to return to normal levels (from current ultra-low levels for certain banks), leading to banks’ RoAs moving closer to the ‘sustainable’ levels, potentially driving greater divergence in RoA across banks, noted Bernstein.

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Overall, the brokerage is more bullish on the banks vs NBFCs (the benefits of corporate growth and lower exposure to consumer credit outweigh the margin risk from a rate cut). Within banks, it believes the larger private sector banks will deliver clearly better metrics vs larger PSB peers and smaller PVBs and hence outperform.

It rates HDFC Bank, Axis Bank, SBI, Paytm as ‘Outperform’; ICICI Bank, and Kotak Mahindra Bank as ‘Market-perform’. It rates SBI Cards as ‘Underperform’.

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