Indian banks’ decade-best metrics and subdued valuations make them a compelling buy: Bernstein

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Indian banks’ decade-best metrics and subdued valuations make them a compelling buy: Bernstein
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  • Indian banks just reported a stellar December quarter driven by healthy growth in margins, loans and a continued improvement in asset quality
  • Decade-best metrics, combined with strong credit growth and no risks to growth or profitability makes Indian banks a compelling buy, according to Bernstein.
  • It also states that the rise in deposit rates will be nearly offset by loans being repriced, thus protecting banks’ margins.
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Indian banks just reported a stellar December quarter driven by healthy growth in margins, loans and a continued improvement in asset quality. Despite this, their valuations remain subdued, according to a report by US-based brokerage Bernstein.

Bernstein adds that Indian banking stocks are still trading below their peak price-to-book multiples, also known as PB ratio. Last seen in 2013, these “subdued valuations, despite strong operating metrics make the risk-reward picture for the Indian banks rather compelling,” the report said.

Bernstein notes that Indian banks’ performance in the December quarter stands out even when compared to their regional peers. When combined with other factors like strong credit growth and no risks to growth or profitability, Bernstein believes Indian banking stocks make for a compelling buy.

While the analyst consensus on Indian banks is bullish overall, there is some divergence with Bernstein saying that even though deposit rates are catching up, the increase will be nearly offset by loans being repriced, while others believe the dream run could soon be over.

According to data from the Reserve Bank of India, there is still a 580 basis points gap in the growth of credit and deposits as of January 2023. Most banks reported a credit growth in the range of 15-20% during the December quarter, while deposit growth stood at 10%, with HDFC Bank being the only exception, reporting a deposit growth of 20%.

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Banks’ return on assets at the highest level in last decade



High profitability has also helped banks deliver a significant improvement in another key metric – return on assets (RoA). According to a Bernstein analysis, most banks have touched a decade-high in terms of return on assets in Q3 FY23.

When compared to the average RoA during the last decade, the top private and public sector banks have all delivered a significantly higher RoA.

Return on assets is a metric that shows how well a company is generating profits from its assets.

According to a CareEdge report, scheduled commercial banks (SCB) reported a 28 basis point increase YoY in their RoAs to 1.2% during the December quarter, and the credit rating agency expects it to remain elevated going forward.

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“This exceptional operating environment combined with below-average valuations make the risk-reward picture quite compelling,” Bernstein added.

BankRatingTarget priceUpside
HDFC BankOutperform₹2,20038%
State Bank of IndiaOutperform₹70031%
Kotak Mahindra BankMarket-perform₹2,10021%
Axis BankOutperform₹1,00018%
ICICI BankMarket-perform₹1,00016%

Source: Bernstein | Upside compared to price as on March 2, 2023

Stellar Q3 driven by healthy credit growth



The state-run State Bank of India reported its highest quarterly profit ever in Q3 at ₹14,205 crore. Overall, all the listed SCBs reported a cumulative net profit of ₹65,532 crore in the December 2022 quarter, growing by 46% year-on-year from ₹44,915 crore in December 2021.

“Increased write-offs have been a key factor, but higher loan growth, supported by lower slippages and improved recoveries, have also played a role,” said a Fitch report, explaining the robust Q3 earnings of banks.
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Decadal-high credit growth, combined with the rise in interest rates helped banks post a 25.5% YoY growth in net interest income (NII) to ₹1.8 lakh crore.

Net interest margins also improved 17 basis points YoY to 3.3%, according to an analysis by CareEdge, driven by loans being repriced while deposit rates continued to play catch-up.

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