Analysts love these four stocks in this struggling sector

These stocks are expected to weather headwinds effectively.
These stocks are expected to weather headwinds effectively.

Summary

  • Four consistently top-rated stocks, holding coveted ‘buy’ ratings from analysts, have defied market trends

Stepping into 2025, the banking sector is recalibrating its approach to balance growth with stability. Guided by the Reserve Bank of India’s (RBI) measures to manage systemic risks and encourage prudent lending, banks are prioritizing deposit growth over aggressive lending strategies. This shift will help address challenges such as stress in unsecured loans and tighter net interest margins (NIM), setting the stage for a stable financial outlook. Armed with robust fundamentals, large banks are expected to weather these headwinds effectively.

These include major players such as ICICI Bank, HDFC Bank, State Bank of India (SBI), and Axis Bank, which continue to inspire confidence and remain analysts’ favourites. Data from Bloomberg indicates that most brokerage firms maintain a “Buy" rating for these banks, citing their strong fundamentals, proactive risk management, and resilience to market pressures.

“Improved profitability and a stronger capital base have been key drivers of the banking sector recently. As the busy season began in October, the advances of banks are likely to further pick up in the subsequent three months, particularly in the retail sector," said Jyoti Prakash Gadia, managing director at Resurgent India. However, Gadia cautioned that pressure on unsecured loan portfolios could impact short-term earnings.

Anchal Kansal, research analyst at Green Portfolio, added, “Due to the RBI’s actions and guidelines, banks are focusing on faster deposit growth over loan expansion. This trend has led to higher deposit growth during Q3 but may compress NIMs and quarterly performance."

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Having said that, valuations have also turned appealing, potentially offering lucrative opportunities for value investors. A comparison of current and historical price-to-earnings (P/E) ratios reveals compelling discounts for these key players. ICICI Bank, HDFC Bank, SBI, and Axis Bank are trading at P/E multiples of 18.4x, 18.1x, 9.35x, and 11.65x, respectively. This compares favourably to their five-year median of 20.7x, 20.2x, 11x, and 23.5x, translating to valuation discounts ranging from roughly 10% to as much as 50%.

In terms of price-to-book (P/B) ratio, the one-year forward P/B for ICICI Bank, HDFC Bank, SBI, and Axis Bank stands at 2.9x, 2.6x, 1.5x, and 1.8x, respectively, compared to their historical five-year median of 2.8x, 2.9x, 1.4x, and 2x. A look at these specific stocks to understand what could have promoted experts to take such contrarian calls. 

HDFC Bank: Strength in asset quality 

Despite a modest return of 0.1% over the past year, HDFC Bank maintains a premium valuation with a P/E ratio of 18.1x, significantly higher than the Bank Nifty’s 12.6x. This premium reflects strong investor confidence in the bank's future performance. Further reinforcing this positive outlook, HDFC Bank's financial health remains robust. The bank’s total capital adequacy ratio (CAR) improved to 19.8% in Q2FY25 from 19.5% the previous year, comfortably exceeding the regulatory requirement of 11.7%. A higher CAR strengthens a bank's ability to absorb losses and meet financial obligations. Its average CASA (current account savings account) deposits grew by 7.3% year-on-year (y-o-y) to 8,08,400 crore, while gross non-performing assets (GNPA) held steady at 1.36%. 

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ICICI Bank: An impressive performer 

ICICI Bank has significantly outperformed its peer, delivering a 23% return over the past year compared to the Bank Nifty's modest 1.7% gain. While its P/E ratio of 18.3x remains above the sector average, strong growth across key metrics justifies this premium. In Q2FY25, average deposits grew 15.6% y-o-y and 3.6% sequentially, with CASA deposits up 10.4% on-year and 1.8% sequentially. The average liquidity coverage ratio (LCR) stood at approximately 120%. The domestic loan portfolio grew impressively by 15.7% y-o-y and 4.6% sequentially (as of 30 September 2024), driven by a 14.2% y-o-y and 2.9% quarter-on-quarter (q-o-q) increase in the retail loan portfolio, which now accounts for a 44.9% of the total portfolio. 

The bank’s gross non-performing asset (NPA) ratio improved to 1.97% in Q2FY25 from 2.15% in Q1FY25.  “ICICI’s loan book is expected to grow by 15.4% y-o-y and 4.3% q-o-q, with deposits projected to rise by 15.9% y-o-y in Q3, said Deven Choksey, managing director of KRChoksey Financial Services Pvt. Ltd. Analysts highlight stable NIMs, robust loan growth, and proactive provisioning as key factors contributing to ICICI Bank's potential outperformance.

SBI: Improved credit quality

The state-run banking behemoth has delivered an impressive 18.5% return over the past year, significantly outperforming the market.  With a P/E ratio of 9.4x, below the sector average, SBI presents an attractive value proposition.

As of September 2024, SBI reported a yearly credit and deposit growth of 14.9% and 9.1%. Asset quality remained healthy, with a low slippage ratio of 0.51% (retail: 0.31%), credit costs at 0.38%, and a provision coverage ratio (PCR) of 75.7%. Its current account deposits grew by 10% y-o-y, and CASA deposits increased by 4.2%, helping to maintain a CASA ratio of over 40%. 

“The bank is expected to post a double-digit deposit growth in H2FY25, supported by a 15% loan growth target for FY25," noted a Mirae Asset Sharekhan report. The bank is expected to sustain its steady performance in terms of growth and profitability in the near to medium term.

Axis Bank: Navigating challenges

While Axis Bank has faced a challenging year with a 6% negative return, its P/E ratio of 11x, below benchmark valuations, suggests potential upside. Q2FY25 saw positive developments: Gross NPAs declined to 1.44% from 1.54% in the previous quarter, consolidated return on asset improved by 9 basis points (bps) y-o-y and 22bps sequentially to reach 1.92%, and consolidated return on equity rose significantly by 140bps q-o-q to 18.08%. Operating profit surged by 24% and 6%, respectively, on a yearly and a sequential basis, driven by strong operating income growth and controlled operating expenses. Deposit growth remained robust at 14%, with new customer acquisitions increasing by an impressive 24% y-o-y.

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However, PL Capital anticipates potential headwinds. “Loan growth may come in at 3% q-o-q, while NIM could see a marginal decline of 4bps to 3.96%. Operational costs and declining other income may weigh on pre-provision operating profit (PPoP), but provision costs are expected to improve."

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