CLSA Expects Rerating For India’s Banking Stocks, Maintains Positive View

CLSA remains positive on select Indian banking stocks despite the recent run-up, citing a fall in credit costs and lower-than-expected slippages.

"While banks have moved up by 20-70% over the past three to six months, we expect a lot more rerating as RoEs (return on equity) normalise," according to a note by CLSA. The research firm's price targets for its top picks Axis Bank Ltd., ICICI Bank Ltd. and State Bank of India Ltd. imply an upside potential of 20-40%.

The Nifty Bank Index has surged nearly 21% after the budget, lead by nearly 45% gains in the nation's largest lender State Bank of India. The public-sector lender surged to a record, also aided by its third-quarter results and bullish management and analyst commentary. Other index constituents saw gains of 12-24%.

India's large banks "hit a home run" in the third quarter with better-than-expected asset quality and pre-provision operating profit performance, CLSA said. That increases the firm's conviction that India's banks will enter a period of a dual benign credit cycle for corporate and retail loans from FY22 and and "hence, we maintain our positive view", it said.

While credit growth is picking up gradually, it remains the key monitorable, CLSA said. But its FY21 and FY22 credit cost estimates for FY21 and FY22 for Kotak Mahindra Bank Ltd. and HDFC Bank Ltd. are down 100 basis points. For SBI, Axis Bank Ltd. band ICICI Bank Ltd., they have fallen 140-200 basis points. "The key positive is that the new Covid-19 impact for large banks over and above their normalised credit costs is just 50-150 basis points of loans."

And despite the pandemic, corporate slippages ICICI Bank, Axis Bank and SBI was 0.5-1.5% of the total loans for the first nine months of FY21, CLSA said. Even for IndusInd Bank Ltd. and RBL Bank Ltd., which have higher BBB/BB-rated exposures, corporate asset quality was better than expected with 2.5-3% slippage. "This marks a turning point for banks like ICICI, Axis and SBI, where corporate books contributed 70-80% of slippage over FY15-20."

"ICICI Bank's multiples are 30-50% higher, but as we have been highlighting, the quality of its earnings has improved materially and historical multiples may not be a fair comparison," CLSA wrote, maintaining its 'buy' rating on the private lender. Its price target of Rs 800 per share implies a 22% upside from Tuesday's close.

CLSA's target price of Rs 560 apiece for SBI implies a further potential upside of 39%. Its price target of Rs 1,000 on Axis Bank suggests a potential upside of 29. "SBI still trades at a 20% discount and Axis still trades at a 10-15% discount to its long-term multiples," the note said.

Analyst Recommendations

• ICICI Bank: All 49 analysts tracking the stock have a 'buy' recommendation. Based on the 12-month Bloomberg consensus price target, the lender has a return potential of 2.7%.
• Axis Bank: According to Bloomberg data, 47 of the 52 analysts tracking the stock suggest a 'buy'; five have a 'hold' rating. The stock is trading close to its 12-month price target of Rs 776.2.
• State Bank of India: 47 of the 49 analysts have a 'buy' call on India's largest lender, while the other two recommend 'hold.' The consensus target price implies a 12-month return potential of 12.1%.