Private sector banks are better positioned than their public sector peers as strong credit growth, Foreign Currency Non-Resident (FCNR) deposit inflows and improving liquidity conditions support earnings, according to Suresh Ganapathy, Managing Director and Head of Financial Services Research at Macquarie Capital.Ganapathy said India’s banking sector remains capable of delivering earnings growth of 14-15%, while additional upside could emerge if interest rates rise later in the year. He also expects private banks to benefit more than PSU lenders from FCNR inflows and a possible return of foreign investor money into ICICI Bank stocks.For investors, Macquarie currently prefers Axis Bank and HDFC Bank over the next 12 months, while retaining a positive long-term view on Aditya Birla Capital. In the non-banking financial companies (NBFCs) space, the brokerage favours Shriram Finance and Kotak Mahindra Bank due to their valuations and the current bond yield environment.
Credit Growth Remains StrongGanapathy said the recent jump in bank credit growth needs to be viewed in the context of a favourable base effect, but remains healthy nonetheless.”We have actually seen a ₹1.5 trillion increase,” he said, referring to the growth in credit between March 31 and May 31. “This is still a pretty strong credit growth because post-GST itself, we did see a pickup, and this credit growth is also very broad-based.”According to Ganapathy, growth is not concentrated in any single sector, although areas such as power and gold loans have contributed to the increase.He added that the banking sector remains on a pretty decent, healthy earnings trajectory even without factoring in any future rate hikes.FCNR Inflows Could Support MarginsGanapathy said FCNR deposits may not significantly boost bank margins directly, but they can help prevent margin pressure by narrowing the gap between loan growth and deposit growth.”The loan growth is at 17.5-18%, and the deposit growth is 12%. So, we are looking at a very big gap of 600 basis points, which is clearly not sustainable,” he said.According to him, FCNR inflows reduce the risk of tighter liquidity conditions and aggressive competition for deposits. He estimates the direct margin benefit at only two to three basis points but believes the broader liquidity support is more important.Preference Shifts to Private BanksGanapathy said the investment case that supported PSU banks over the past few years has weakened as liquidity coverage ratios (LCRs) have declined and loan-to-deposit ratios have risen.”The PSU bank rally is over, and it makes every sense to move towards the private sector banks at this point in time,” he said.He argued that private banks are likely to receive a larger share of FCNR deposits and are better positioned to benefit from improving funding conditions.Foreign Flows Could Lift Banking StocksHe also pointed to the large number of foreign investors selling in Indian financial stocks over the past year, despite improving fundamentals.”This year we have seen $25 billion of selling in India, and 50% of that has come in financials,” he said.Ganapathy noted that credit growth, asset quality, profitability and margins remain supportive, making private banks potential beneficiaries if foreign flows return.He highlighted Kotak Mahindra Bank as an example, noting that foreign ownership has declined significantly over the last 18 months.NBFCs Offer Tactical OpportunityGanapathy believes NBFCs could outperform banks in the short term due to falling bond yields and easier liquidity conditions.He said the current environment should support NBFCs for the next three to six months.However, he cautioned that the outlook could change later in the year if fiscal pressures push government borrowing higher and bond yields rise.For the full interview, watch the accompanying videoCatch all the latest updates from the stock market here
Source link
