Following a disappointing performance in the June quarter (Q1FY25) for the banking space, Axis Securities has identified ICICI Bank, State Bank of India (SBI), and Federal Bank as its top picks in the sector. Meanwhile, among NBFC, it has chosen Cholamandalam Investment & Finance Company (CIFC) and Nippon Life India Asset Management on the back of healthy growth momentum and margin stability in Q1.
Banks (including small finance banks) under Axis securities' coverage reported a healthy credit growth of around 15 percent YoY, slightly below the expected 16 percent YoY (excluding HDFC Bank). This growth was driven mainly by retail and SME segments, though unsecured lending growth slowed for some banks. It further noted that corporate credit growth was mixed, with some banks facing tough competition and unfavorable pricing, while others saw strong demand.
NIMs continued to compress, albeit at a slower pace, due to deposit repricing and regulatory changes. Net interest income growth was below expectations at 9 percent YoY and 1 percent QoQ, but most banks expect NIMs to stabilize soon, it noted. Fee income growth aligned with business expansion, while operational expenses for private banks rose due to investments in technology and new products, stated the brokerage.
Additionally, Public sector banks saw improved cost ratios as wage revisions took effect. PPOP decreased by 2 percent QoQ but increased by 7 percent YoY. Slippages rose due to seasonal stress in personal, credit card, and microfinance portfolios, pushing up credit costs by about 27 percent QoQ, informed Axis. Overall earnings growth (excluding HDFC Bank) decelerated by 2 percent QoQ but rose 13 percent YoY.
In the latest quarter, NBFCs under Axis' coverage achieved a robust 28 percent YoY AUM growth, aligning with expectations. Disbursement momentum slowed due to seasonality, with affordable housing financiers (CANF and APTUS) experiencing a sharper decline than anticipated, while vehicle financier CIFC saw a milder drop. Margins generally faced pressure due to increased cost of funds (CoF), with notable contractions in NIMs for CANF, APTUS, and gold financier MANAPPURAM.
It further noted that CIFC and diversified financiers like BAF also reported margin declines, though MASFIN showed improvement. Microfinance lender CAGRAMEEN saw a slight NIM drop, reflecting broader trends. NII growth was around 26 percent YoY and 5 percent QoQ, consistent with forecasts. Asset quality showed minor QoQ increases, but concerns grew over microfinance borrowers' over-leveraging, prompting MFIN to introduce new guidelines, stated the brokerage.
Credit card issuer SBICARD continued to struggle with high delinquencies and credit costs despite implementing stricter measures. Meanwhile, life insurer SBILIFE reported a 20 percent YoY increase in APE, driven by strong ULIP growth, though VNB margins fell due to a shift in product mix, it said. Furthermore, Asset Management Company NAM also reported strong AUM growth and market share gains, added the brokerage.
The brokerage has reduced growth estimates for most banks but foresee credit growth surpassing deposit growth, driven by retail and MSME lending, with cautious expansion in corporate lending. It further expects PSU Banks should maintain stable margins, while larger private banks may see slight NIM compression, with mid-sized and smaller banks facing continued pressure in the first half of FY25. Asset quality issues are manageable, and significant increases in credit costs seem unlikely, it added. Axis has adjusted forecasts for banks, expecting NIM stabilization and normalization of credit costs, with RoAs remaining steady. Valuations are attractive, keeping us positive on select banks, it said.
As per the brokerage, Anticipated rate cuts by the end of CY24 could support NIMs for NBFCs. It added that management commentary is positive, with most lenders aiming for 20 percent AUM growth in FY25. Recent budget announcements are favorable for affordable housing financiers, and while asset quality issues are minimal except for microfinanciers and credit cards, improvements are expected, It said. Elevated credit costs are anticipated for microfinanciers, with asset quality trends for other financiers to be monitored, added the brokerage.
ICICI Bank: The brokerage has a buy call on the private sector lender with a target price of ₹1,420, implying an upside potential of almost 21 percent.
ICICI Bank reported yet another strong quarter, showcasing robust credit growth, healthy margins with only a minor 4 basis points QoQ moderation, and solid asset quality, keeping credit costs steady, highlighted the brokerage. While NIMs might face some pressure due to rising cost of funds and draft guidelines on liquidity coverage ratios, they are expected to stabilize around 4.3 percent over FY25-27, it noted.
Moreover, Opex growth is anticipated to align with business growth, maintaining the C-I Ratio in the 40-41 percent range, it said. Axis expects ICICI Bank to achieve a consistent RoA of 2.2 percent and RoE of 17-18 percent over FY25-27. It continues to favor ICICI Bank among private sector banks due to its strong retail liability franchise, growth prospects, stable asset quality, healthy provision coverage, and robust return potential.
SBI: The brokerage has a buy call on the largest public sector lender with a target price of ₹1,030, implying an upside potential of 26.5 percent.
According to Axis, the lender's credit growth remains robust as the bank is well-positioned with a C-D Ratio of 70-72 percent, allowing for accelerated credit expansion compared to deposit growth. The focus will be on managing growth across segments to optimize capital usage, especially in the Xpress Credit Card segment. It further informed that the corporate sanctions pipeline is healthy at around ₹4.6 lakh crore, mainly from the private sector. SBI aims to sustain a RoA of 1.1 percent by prioritizing deposit growth and shifting assets from lower-yield investments to higher-yield loans, maintaining margins around 3.2 percent. Despite potential impacts from new regulatory norms and a steady-state credit cost of 50 basis points; lower Opex growth should drive healthy PPOP growth, supporting the bank’s RoA over FY25-27, predicted the brokerage.
Federal Bank: The brokerage has a buy call on the banking stock with a target price of ₹230, implying an upside potential of over 13 percent.
The brokerage emphasised that FB's deposit growth has surged, driven by a rebound in NRE deposits, branch network expansion, improved CA offerings, new products, digital initiatives, and enhanced staff scorecards. The bank aims for 18-20 percent credit growth in FY25, matching deposit growth, and anticipates lifting restrictions on co-branded credit cards by Q2 or Q3 FY25.
While focusing on organic credit card growth and cautious personal loan expansion, FB targets a RoA improvement to 1.4 percent by FY27E, it stated. Axis expects a RoA of 1.3-1.35 percent and RoE of 14-16 percent over FY25-27E, supported by stable NIMs, a better Opex ratio, and consistent credit costs.
CIFC: The brokerage has a buy call on the NBFC stock with a target price of ₹1,710, implying an upside potential of almost 27 percent.
Axis Sec noted that CIFC started FY25 strong with robust AUM and disbursement growth, surpassing expectations despite election impacts. The company forecasts disbursement and AUM growth of 20-25 percent and 25-30 percent, respectively, and plans to adjust its portfolio mix, reducing Vehicle Finance (VF) to 50 percent while increasing Home Loans (HL) and Loans Against Property (LAP) to 35 percent.
It expects NIMs to improve due to a shift in disbursement mix and higher yields in the VF segment, with incremental yield benefits flowing in gradually. Cost ratios should decrease as efficiency and lower Opex in new businesses take effect. CIFC targets a pre-tax RoA of 4 percent over the next five years, with stable asset quality capping credit costs at 1-1.2 percent.
With a strong FY25 start and increased contributions from non-VF segments, CIFC is set for 26 percent CAGR AUM growth and ~30 percent CAGR earnings growth over FY25-27E, aiming for RoA/RoE of 2.6-2.7 percent and 21-22 percent, respectively, forecasted the brokerage.
Nippon Life: The brokerage has a buy call on the NBFC stock with a target price of ₹740, implying an upside potential of just over 3 percent.
As per the brokerage, NAM focuses on growing large-cap, small-cap, mid-cap, and proven sectoral funds, while expanding passive fund offerings and capitalizing on international equity flows. Blended yields have slightly declined due to SEBI’s pricing formula and higher acquisition costs, with a forecasted yield compression of 2-3 bps annually over FY25-27E.
Despite this, NAM is expected to achieve a 21 percent CAGR in revenue, it predicted. As one of the fastest-growing AMCs in B-30 cities, NAM is well-positioned for strong AUM growth, projecting 24 percent CAGR in AUM, 21 percent in revenues, and 15 percent in earnings over FY24-27E, making it a strong investment opportunity, said the brokerage.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.
