Why FY24 could be a good year for bank stocks - explained | Mint
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Business News/ Markets / Stock Markets/  Why FY24 could be a good year for bank stocks - explained

Why FY24 could be a good year for bank stocks - explained

LKP Securities' top picks: Bank of Baroda and Federal Bank. The brokerage also considers 4 other private banks as high quality. Check which ones are these

ICICI Bank, HDFC Bank and Yes Bank led the losses in banking stocks.Premium
ICICI Bank, HDFC Bank and Yes Bank led the losses in banking stocks.

The new financial year started on April 1, 2023, the focus is now on interest rates and banking space. Here is what to expect from bank stocks in FY24:

Outlook of Credit Growth for Indian Banks in FY24

For FY24, the credit growth, whatever we have seen in FY23, the growth is not going to be sustained at the absolute amount, the growth rate will narrow down marginally. So the long-term credit multiplier for the entire Indian banking system is around 1.3x. According to the RBI and many government agencies, the nominal GDP growth is expected to be around 10% to 11%. So factoring 1.3x of credit multiplier, we believe the credit growth should be around 14% to 15% for FY24E.

Simultaneously, the deposit growth is going to stay a little lukewarm as compared to the credit growth. We have seen the weighted average call rate of many banks are increasing, so the deposit rates are going to increase to attract more deposit customers and mobilisation of deposits. So we can see deposit growth to be around 10% to 11% for FY24E. The external financing is going to stay high to maintain the entire credit growth whatever we are expecting of 15% for FY24.

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Performance of Asset quality in FY24​

We are in the tailwind of asset quality cycle. The asset quality has improved significantly in the last 4 to 5 years. The Public sector banks, which have lumpy corporate accounts, which are in GNPA, have made provisions against it and written-off most of the credit book from their balance sheet. So the credit quality of the entire banking system, except few which are lagging, i.e. few public banks and few private banks, the entire credit system and the entire banking system, the asset quality is going to be robust. We are in the bottom of the cycle and are expecting the restructuring book not to harm substantially. And the ECLGS books are also in a very contained way. So we are not seeing major hiccups in asset quality for FY24E. Therefore, the credit cost is going to stay in a range and which is going to improve the entire profitability of the banking system.

Top Banking Picks for FY24

We have categorised our fundamentals focusing more on the credit growth, how the margins are going to play and how the asset quality improvement will translate into lower credit cost. Considering these three factors, we are preferring and betting on the banks having a good amount of credit growth in the next financial year, and they are going to keep the margins intact and have at least GNPA formation in their balance sheet.

Our top picks are Bank of Baroda among the Public sector, and Federal Bank in the Private space because of the valuations, the growth, the margins, the asset quality and the entire metrics. Hence, these two banks are going to outperform the entire period in FY24.

We believe the interest rate hikes are going to conclude. At most we can see a 0.25% repo rate hike in the upcoming MPC meetings. So factoring the rate hikes, we believe the liquidity is going to sustain in the market in the coming months and we also have to keenly monitor the entire output system and the growth in the entire economic activity, leading to a good market performance. So the entire banking universe is going to perform well in FY24E. We are also bullish on high quality banks like HDFC, Kotak Mahindra, ICICI and Axis Bank.

The author, Ajit Kabi is banking analyst at LKP Securities

Disclaimer: The views and recommendations shared by the analysts are their own and Mint is not responsible.

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Published: 04 Apr 2023, 11:45 AM IST
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