Domestic brokerage firm Systematix Institutional Equities prefers private sector banks over public sector banks, believing that private lenders offer superior valuation comfort compared to PSUs.
The brokerage in its latest report pointed out that PSU banks generally have a greater cushion for PPOP outperformance versus private banks in the near term, i.e., for FY25, due to low CDR and the base effect from the high wage bill of FY24.
However, it believes that from a medium- to longer-term perspective, private banks should deliver superior risk-adjusted returns due to deeper penetration into semi-urban and rural markets, conservative underwriting standards, and tech-enabled operating leverage.
While operating profit growth in FY25 is expected to be superior for PSU banks compared to private banks, the brokerage sees more valuation comfort in private bank multiples versus those of PSU peers.
Large-cap private banks like Kotak and HDFC Bank and mid-cap banks like IndusInd Bank are trading at valuation discounts to historical trends due to near-term idiosyncratic concerns. As these banks work out their current limitations, their valuation multiples should improve, providing a boost to their share returns in addition to their14% CAGR in ABVPS over FY24–26E, it said.
On the other hand, the brokerage pointed out that most PSU banks are averaging 1.1x forward ABVPS against forward RoAs of 1.0–1.1%, factoring in comfort on CDR, NIMs, operating expense normalisation, and continued headroom for recoveries, albeit at a slower pace.
It also notes that despite the strong share performance of SBI CYTD, the premium of SBI versus other PSU banks at 32% is significantly below its decadal average premium of 116%. Thus, the brokerage's pecking order of preference is - IndusInd Bank, HDFC Bank, SBI, Kotak Mahindra Bank, Federal Bank, ICICI Bank, and Axis Bank.
Systematix highlights that IndusInd Bank has the highest earnings growth trajectory within its coverage universe. It notes attractive valuations for HDFC Bank, coupled with expectations of improving profitability from NIM improvement and operating leverage.
SBI is noted for its all-around improvement in profitability, with improved FY25/26 earnings growth, following the bipartite wage hike-affected FY24 earnings. For the Federal Bank, the likely abatement of management concerns post acceptance of the MD candidate by the RBI is a positive factor.
Kotak is seen as having attractive valuations coupled with the expectation of the removal of RBI restrictions, similar to HDFC Bank. ICICI's recent underperformance factors in a modest FY25 earnings growth outlook. Axis's stock run-up post results has capped the upside to the brokerage's CDR-constrained conservative target price.
Systematix maintains a 'buy' rating on HDFC Bank with a target price of ₹1,885. It also has ‘buy’ ratings on Axis Bank (TP: ₹1,270), ICICI Bank (TP: ₹1,275), SBI (TP: ₹950), Kotak Mahindra Bank (TP: ₹1,815), and IndusInd Bank (TP: ₹1,875).
Conversely, Systematix has a 'hold' rating on Federal Bank with a target price of ₹190 per share.
Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.
