Stocks to buy: ICICI Bank, IndusInd Bank, BoB among Motilal Oswal’s top picks in financial services sector

The banking and financial services industry is expected to see decent growth with earnings expected to remain resilient despite net interest margin (NIM) compression in the second quarter of FY24.

Brokerage firm Motilal Oswal Financial Services expects systemic loan growth to remain healthy at 14% YoY in FY24, driven by continued traction in the Retail and SME segments.

It estimates its banking coverage universe (excluding HDFC Bank) to report earnings growth of around 22% YoY in Q2FY24.

Read here: Banking sector earnings preview: Expect a decent YoY earning growth in Q2 despite NIM compression, says Motilal Oswal

ICICI Bank, IndusInd Bank, Bank of Baroda and SBI Life Insurance Company are the top picks of Motilal Oswal in the Banking, Financial Services and Insurance (BFSI) space.

ICICI Bank | Buy | TP: ₹1,150

ICICI Bank has reported strong growth and profitability for the past few years while increasing provision coverage ratio (PCR) to around 83% as of Q1FY24, the highest in the industry. 

The bank is becoming a growth leader in the SME and Retail segments, aided by continued investments in technology and partnerships with new ecosystem players. Brokerage firm Motilal Oswal expects an 18% loan CAGR over FY23-25 for the bank.

“ICICI Bank has room for re-rating as it continues to deliver solid return ratios and sustainable growth, led by its focus on core operating performance. We estimate RoA/RoE of 2.2%/18.0% in FY25,” Motilal Oswal said.

The brokerage has a ‘Buy’ rating on ICICI Bank with a target price of ₹1,150 per share, implying an upside of more than 22% from Thursday’s closing price.

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IndusInd Bank | Buy | TP: ₹1,650

IndusInd Bank has reported healthy Q1FY24 performance with earnings growth of 30% YoY, aided by healthy net interest income (NII) growth of 18% YoY and lower provisions. Margins have been flat for the last few quarters, with growth in advances driving the overall profitability.

IndusInd Bank has maintained its market share of ~2% of net systemic advances, backed by its leadership position in the vehicle finance and MFI segments, which constitute 26% and 10% of its advances, respectively, as on 1QFY24. The management has guided for 18-23% loan growth under PC-6, while a moderation in credit cost is expected to aid ROA expansion, the brokerage noted.

Motilal Oswal has a ‘Buy’ rating on the stock with a TP of ₹1,650 per share, which is expecting nearly 18% upside.

It estimates RoA/RoE of 2.0%/17.4% in FY25. The stock trades at an attractive valuation of 1.5x FY25E ABV, it added.

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Bank of Baroda | Buy | TP: ₹240

The public sector lender Bank of Baroda has reported a strong improvement in asset quality, aided by improved underwriting and higher collection efficiency. 

Motilal Oswal expects the bank’s retail book growth to be 1.5x higher than total loan growth and to gain share in the overall loan mix. 

“This, along with a pick-up in the SME and Corporate books, should support loan growth and sustain it higher versus peers. With a moderation in margins due to the rising cost of deposits, and a majority of the floating rate book being already re-priced, we expect NII to remain flat QoQ. However, a healthy CASA mix in the 40-42% range will limit the decline,” the brokerage said.

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It estimates FY25 RoA and RoE of 1.2% and 17.1%. The stock trades at attractive valuations of 0.9x FY25E ABV, it added.

The brokerage firm has a ‘Buy’ rating on the stock and a TP of ₹240 per share.

SBI Life Insurance Company | Buy | TP: ₹1,570

SBI Life Insurance Company has witnessed sluggish growth in premiums across segments, with 4% YoY growth in Individual WRP and flat YoY growth in Group WRP in 1QFY24. Both the agency and banca channels contribute to growth. 

The brokerage estimates a 20% APE CAGR over FY23-25, driven by continued momentum in Non-PAR and Protection products.

Persistency ratios are likely to remain healthy across cohorts. The cost ratios are also likely to remain in control thanks to a revival in business growth and operating leverage kicking in.

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“We estimate a 19% VNB CAGR over FY23-25 and operating RoEV of ~21.3% by FY25, while VNB margins should be stable at ~30%,” it said.

Motilal Oswal has a ‘Buy’ rating on the stock with a target price of ₹1,570 per share, implying an upside of over 23% from Thursday’s closing price.

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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 decisions.