Indian banks well placed with strong balance sheets, record profits, cheap valuations: CLSA; likes IndusInd, ICICI Bank

  • Indian banks are in a strong position with robust balance sheets and profits, says CLSA. Return on equity is at a 10-year high of 15%, while NPL ratio is at a decade low. Private banks are predicted to surpass PSU banks in performance.

Ankit Gohel
First Published17 Jun 2024, 10:32 AM IST
Private sector banks, which have been stock market laggards, should now give better returns given a good business outlook and inexpensive valuations, says CLSA.
Private sector banks, which have been stock market laggards, should now give better returns given a good business outlook and inexpensive valuations, says CLSA.(Photo: REUTERS)

Indian banks have established themselves on a much stronger footing led by cleaner balance sheets, record profits and inexpensive valuations, foreign brokerage firm CLSA said.

“We believe Indian banks are well placed after a rollercoaster decade. Balance sheets are the strongest they have been in over a decade and profits have rebounded sharply (quadrupling in 10 years),” CLSA said in a report.

It noted that the return on equity (ROE) of the Indian banking sector at 15% is the highest since the Financial Year 2010-2011. The net NPL/net worth ratio of the banking sector has declined to decadal lows, driven by better asset quality, stronger provision buffers and an improved capital position. PAT for the sector has rebounded sharply and has quadrupled over the past decade.

Also Read: Private lenders take lead in employee strength ahead of PSU peers

“In this context, PSU Banks have re-rated sharply from a low base, while private sector banks have been laggards. We expect the underperformance of the latter to reverse,” CLSA said.

Moreover, the banking sector loan growth has picked up from a decadal average of 10% to 15% over the past two years driven by all sub-segments and possibly some shift from corporate bond substitution.

While CLSA expects a degree of normalisation in unsecured loan growth from 20%+ to mid-to-high teens, it estimates overall loan growth at 14-15% over the next two years.

“We expect private sector banks to continue gaining market share. However, FY25 loan growth across our coverage banks is likely to be divergent due to idiosyncratic issues,” the brokerage report said.

Also Read: Infra stocks to continue their run beating capital goods shares, here's why

Meanwhile in the past two years, lower deposit growth could be attributed to lower reserve money growth, which CLSA’s India economist expects will pick up. One notable trend over the past decade is that private sector banks have outpaced PSU Banks in current account (CA) deposits by a margin and have also pared down non-deposit borrowings. This gives them a funding cost similar or marginally better than that of PSU Banks, making them competitive on the loan side.

Banks have underperformed the broader index by a wide margin in the past five years. Specifically, this is driven by private sector banks that have underperformed PSU Banks by 80 ppts in the past year alone.

CLSA believes private sector banks, which have been stock market laggards, should now give better returns given a good business outlook and inexpensive valuations (10-15x PE versus the Nifty 50 at 18x).

Also Read: How to navigate stock market trends? Here are 6 key strategies for investors

The key short-term risk is a sharp repo rate cut that would reverse the net interest margin (NIM) improvement banks have delivered.

Among the large banks under its coverage, CLSA expects ICICI Bank to deliver the highest ROE (16-17%). While Kotak Mahindra Bank has a high ROA, its low leverage results in a low ROE. HDFC Bank’s lower ROE is due to the NIM impact from the merger, it said.

CLSA likes large banks with a preference for ICICI Bank and IndusInd Bank.

Read all Stock Market News Updates here

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 making any investment decisions.

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.MoreLess

News in Numbers

Numbers that help you understand news better
$24 M

$13.8 B

₹313 Cr

₹773.44 Cr

34.7 M sqft

250,000

$4.5 B

First Published:17 Jun 2024, 10:32 AM IST
HomeMarketsStock MarketsIndian banks well placed with strong balance sheets, record profits, cheap valuations: CLSA; likes IndusInd, ICICI Bank

Most Active Stocks

Tata Steel

167.05
03:57 PM | 16 JUL 2024
0.25 (0.15%)

Oil & Natural Gas Corporation

322.40
03:58 PM | 16 JUL 2024
-0.15 (-0.05%)

Bandhan Bank

198.30
03:41 PM | 16 JUL 2024
2.95 (1.51%)

Coal India

512.35
03:59 PM | 16 JUL 2024
14.4 (2.89%)
More Active Stocks

Market Snapshot

  • Top Gainers
  • Top Losers
  • 52 Week High

Natco Pharma

1,281.05
03:59 PM | 16 JUL 2024
73.2 (6.06%)

Century Textiles & Industries

2,217.55
03:48 PM | 16 JUL 2024
116.85 (5.56%)

Tata Teleservices Maharashtra

81.33
03:54 PM | 16 JUL 2024
4.23 (5.49%)

India Cements

323.05
03:55 PM | 16 JUL 2024
15.8 (5.14%)
More from Top Gainers

Recommended For You

    More Recommendations

    Gold Prices

    • 24K
    • 22K
    Bangalore
    75,246.00928.00
    Chennai
    75,099.00344.00
    Delhi
    74,806.00-460.00
    Kolkata
    75,466.00419.00

    Fuel Price

    • Petrol
    • Diesel
    Bangalore
    102.86/L0.00
    Chennai
    100.76/L0.00
    Kolkata
    104.95/L0.00
    New Delhi
    94.72/L0.00
    OPEN IN APP
    HomeMarketsPremiumInstant LoanMint Shorts