HDFC Bank, SBI: Analysts bullish on bank stocks as credit revival picks up

Analysts at Credit Suisse are more optimistic compared to their peers and expect double-digit growth in credit off-take during the second half of the current fiscal (H2-FY22)

Banks’ earnings for the July-September quarter (Q2FY22) came as a glimmer of hope for the cyclical sector as formation of non-performing assets (NPAs) peaked with credit growth beginning to pick up.

Growth in advances picked up for large private banks in the September 2021 quarter of fiscal 2021-22 (Q2-FY22), with ICICI Bank, HDFC Bank, IndusInd Bank, and Federal Bank reporting a sequential uptick of 3.5–5 per cent. While Kotak Mahindra Bank reported a sharp growth of 8 per cent quarter-on-quarter (QoQ), Axis Bank witnessed flattish trends. Within this, corporate growth remained muted for HDFC Bank; declined 2–5 per cent for Axis Bank and ICICI Bank; but grew strongly at 7–9 per cent for Kotak Mahindra Bank and IndusInd Bank.

Their public sector counterparts, State Bank of India (SBI) reported growth of 4.61 per cent YoY in domestic loan book, while Bank of Baroda (BoB) reported a 2 per cent YoY growth in total loan book.

With the economy getting back on its feet after the second Covid wave, analysts expect overall credit growth to accelerate further going ahead on the back of strong underlying momentum in consumer retail credit, including mortgages, cards and personal loans.

“Banks reported a healthy performance on improved business growth and asset quality trends, resulting in an earnings beat across most of the sector. We expect this growth momentum to continue as economic activity recovers,” said analysts at Motilal Oswal Financial Services in an earnings review report.

Analysts at Credit Suisse, on the other hand, are more optimistic and expect double-digit growth in credit off-take during the second half of the current fiscal (H2-FY22). Click here to see bank-wise estimate

“Bank loan growth that has languished at 6 per cent over the past year is expected to move to double digit on the back of improving demand and bank risk appetite. Retail, and small and medium enterprises’ (SME) loans are both growing at 15-20 per cent. Improved risk appetite is now visible in unsecured loans, growing 4-8 per cent, and should help broad base the retail growth,” said Ashish Gupta, research analysts at Credit Suisse, in a co-authored report with Kush Shah and Jayant Kharote.

Corporate loans: A key anchor

While retail loans are driving the overall credit book, analysts believe a broad-based credit off-take recovery will depend on the corporate loan book. Credit Suisse believes since deleveraging has stabilised in some sectors (such as telecom, Oil & Gas), corporate loans will not become a drag on system growth in H2FY22.

Analysts at domestic brokerages, however, continue to remain cautious on the corporate segment and expect growth to remain sluggish.

“Corporate growth was sluggish (in Q2-FY22) due to under-utilisation of capacities and deleveraging, forcing few PSBs to cut growth guidance by 100-200bps. Therefore, we trim our systemic credit growth estimates to 8 per cent from 9 per cent for FY22,” said analysts at Emkay Global.

Siddharth Purohit, equity analyst at SMC Global, concurs with the view and says that the system-wide credit growth will remain in high single digit during FY22 as corporates are turning to money market, rather than financial institutions, to avail loans at competitive rates.

Considering the above arguments, analysts at Credit Suisse and Prabhudas Lilladher prefer ICICI Bank, Axis Bank, HDFC Bank, and SBI. ICICI Bank remains the top pick for Emkay Global in the banking sector, followed by SBI, HDFC Bank and Axis Bank.

“We like IndusInd Bank, too, as we see a turnaround story with strong provision/capital buffers in place, though better handling of management changes and evergreening allegations would have been appreciated. Among small/mid-size banks, we like Federal, Indian Bank and Equitas SFB,” it said.