Top Bank Stocks To Buy Now: Sector Update By ICICI-Direct

Excesses disappear, valuations touching base…

Covid-19 and the recent fiasco of a private sector bank has added to the woes of the financial sector with expectation of continued slower growth and rising retail delinquencies to dent earnings ahead.

A sharp correction in the Bank Nifty that fell ~50% from the top has removed excesses in valuations of large banks as well as large NBFCs, though a bottom may or may not be formed yet. HDFC Bank (-35%), IndusInd Bank (-78%) are trading at 2.6x, 0.7x ABV from peak of 3.4x, 2.9x, respectively, while Bajaj Finance is now trading at 3.6x ABV. While it is not necessary that leaders of previous rally will remain so in a new rally, outperformers may change ahead.

Markets are moving towards non-lender based financial sector stocks- insurers and asset managers as they do not carry balance sheet risk and offer growth opportunities.

Therefore, our top picks are SBI Life, HDFC AMC, Axis Bank and Kotak Mahindra Bank in this market environment. Valuation decline has made HDFC Bank attractive for accumulation but leadership concerns are in sight.

We believe large private banks are better than NBFCs as balance sheet management and lower growth concerns stay. Secured loan based entities are more preferable than unsecured in the current environment. Small HFCs, as a segment, can be avoided as concerns on delinquencies both on retail and developer level would stay apart from growth concerns.

An economic slowdown is expected to lead credit growth to stay in single digits even in FY21. Fresh concerns on large exposures (e.g. Vodafone-Idea, Indiabulls, etc) and now MSME/ unsecured retail as a pie are seen adding to the overall stress.

Exposure of PSU banks and regional private sector banks is high in SME, MSME segments. Therefore, these banks may take longer to recover from the current balance sheet blow.