Investors’ love affair with bank stocks cools as earnings are set to moderate

One trigger that unnerved investors was the Hindenburg Research report, flagging the exposure of Indian banks, especially public sector banks, to the Adani Group

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The star sectoral performers of 2022, the Nifty Bank and Nifty PSU Bank indices, have underperformed this year

The Nifty Bank rose about 20 percent, while the Nifty PSU Bank gained over 50 percent in 2022. The benchmark Nifty gave a modest 4 percent return.

In this calendar year so far, the Nifty Bank has declined 5 percent and the Nifty PSU Bank dropped over 10 percent, both underperforming the Nifty, which has fallen 2 percent.

Listen to the story here

One trigger that unnerved investors was the Hindenburg Research report, flagging the exposure of Indian banks, especially public sector banks, to the Adani Group. This was quickly rebutted by individual banks as well as the Reserve Bank of India (RBI).

State Bank of India (SBI) issued a statement that its overall exposure to the Adani Group was 0.88 percent of the book or around Rs 27,000 crore. Bank of Baroda’s total exposure stood at 0.60 percent of net loans as of end-Q3FY23.

Also Read: FM Sitharaman on Adani: LIC, SBI exposure to group within permissible limits

RBI Governor Shaktikanta Das said domestic banks’ exposure to the Adani Group was “not very significant”, and the system was strong and large enough to not be impacted by a single case.

What else could be troubling the sector? 

Banks’ Q3 performance has been a blockbuster one, to say the least. For banks under Kotak Institutional Equities’ coverage, earnings growth came in at 45 percent Year-on-Year (YoY) in the three months to December 31, aided by operating profit growth of 30 percent YoY.

Net interest margins (NIMs) expanded and Net Interest Income (NII) growth touched a decadal high. Asset quality also improved, with gross non-performing loans at a seven-year low and net non-performing loan at a 10-year low.

But, are these numbers sustainable?

Banks’ margins quickly expanded last year due to faster repricing of floating-rate loans that are linked to external benchmark rates. Banks are always quick to hike interest on loans when the repo rate increases but raise deposit rates with a lag.

Also Read: IDBI Bank divestment: Why has it sparked so much interest?

According to Bernstein Research, the current NIM level is in line with the peak levels seen since 2013. In Q3, SBI’s NIM was 3.3 percent, ICICI Bank 4.7 percent, Axis Bank 4.3 percent and Kotak Bank’s was 5.5 percent—all peak levels seen between FY14 and now.

Now, as the repo rate inches towards peak levels, the scope for margin expansion is limited, believe analysts. “Liabilities (deposits) are getting repriced higher at a faster pace compared to loans,” according to a report by Nuvama Institutional Equities.

The fight for deposits is getting more intense and growth in loans is becoming weaker. In some cities, banks have literally taken to the streets to solicit deposits, as reported by Moneycontrol.

“Demand is now faltering in a more broad-based manner. Apart from exports, even domestic demand is seeing some cracks and corporate cashflows have weakened. This, in turn, should result in a moderation in the credit cycle going ahead,” added Nuvama.

It believes that the consensus estimate of 18 percent net profit growth for banks and 15 percent net interest income growth in FY24 looks a bit stretched and the actual numbers could disappoint.

Stocks to watch out for 

Kotak Institutional Equities believes that investors should shift their stock preference towards Tier-1 banks from Tier-2 banks. That means optimism is higher for HDFC Bank, ICICI Bank, Axis Bank and SBI compared to other banking names.

Within the private sector banks, Bernstein Research expects HDFC Bank to see a better margin trajectory than peers in the next 12 months, given its lower share of external-linked loans.

Also Read: Bancassurance turns nightmare as bankers face pressure to sell insurance products

Jefferies believes PSU banks may have some steam left in them as they are still trading at a 70 percent discount to private sector peers, despite the run-up in 2022.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.????????????