Indian Private Banks Should Rally Further – BUY

A Rising Tide Lifts All Boats so it was True with Banking Stocks. Indian banks are up 42% YTD – the key driver being growing confidence in the economy, hence better asset quality.

The first leg is driven by expectations around better asset quality. As tail risk recedes, stocks move sharply to normalized multiples – that has already occurred for the group. The second and more sustained leg is driven by a loan growth pickup, which sets an earnings upgrade cycle in motion; we are still waiting for that.

Loan growth is now below 10%, unlikely to sustain. A capex cycle is needed for loan growth to go back to 20% levels – looks tough in the next 1-2 years. However, we expect retail to be strong and SME / working capital demand to pick up – helping system loan growth to trend to 15% by F15. This will drive the second leg of rally in Banking Stocks

AVOID Direct exposure to PSU Banks
We believe that unless well capitalized, PSU banks will struggle to grow in double digits (low CET1 and weak capital generation), allowing private banks to gain share in the desired segments. This will likely drive outperformance by the private banks in the second leg.

Indian Private Banks and Financial Institutions 12 Month Stock Target Price
Axis Bank – Rs 500
HDFC Bank Rs 1100
HDFC Rs 1260
ICICI Bank Rs 1900
IndusIndBank Rs 700
Kotak Bank Rs 1250
Yes Bank Rs 690
LIC Housing Finance Rs 400
Shriram City Union Finance Rs 2100

The above target prices are based on our Research and we’d like to state that we are LONG in some of the counters.