Investors have turned cautious on the Indian financial sector for the time being, with many calling the Chinese market a good tactical bet, according to Macquarie.
The brokerage pointed out concerns over stretched valuations for India against China after meeting investors in Hong Kong and Singapore last week. Chinese market is trading at eight times price/equity versus India trading at over 20 times P/E, the brokerage said in a note.
Investors were also concerned by the recent actions taken by the Indian market regulators viz. the Reserve Bank of India and the Securities and Exchange Board of India, Macquarie said in a March 18 report.
The Indian financial sector may see falling loan growth and margins, along with normalisation of credit costs, implying a lower return on assets, the brokerage said.
However, the preference was more towards public sector banks as their liquidity position and loan-to-deposit ratio are lower, implying a relatively lesser impact on profitability, the brokerage said.
"The trade continues to be long with PSU banks, sell on private sector banks," Macquarie said. However, investors have a favourable view of the general insurance and capital market spaces, it said.
Below is Macquarie's view of key financial sector companies:
HDFC Bank Ltd.: The private sector lender now has value, but it's still not time to go long, according to Macquarie. Many hedge funds have tried to cover their short positions in HDFC Bank, but investors, in general, are still not confident of the bank delivering good numbers in the near term, the brokerage said.
Shriram Finance Ltd.: The company seems to be a consensus overweight position for many of the investors, Macquarie said. "Investors were looking at PSUs more favourably due to the current liquidity conditions and tailwinds in the NPL cycle."
One 97 Communication Ltd.: Investors found no interest in this fintech company until the regulatory dust settles on Paytm Bank, the brokerage said.
PB Fintech Ltd.: The company found more takers, but valuations look stretched, and the brokerage anticipates some profit-taking at current levels.
HDFC Life: Investors are concerned that its parent bank is more likely to sell more deposits than insurance, with growth challenged in the near term.
SBI Life Insurance Co.: It was the preferred pick for the investors.
SBI Cards And Payments Services Ltd.: Investors have a consensus 'sell' on the company owing to the recent spate of regulations on credit cards as well as NPL issues for them, the brokerage said.
Nomura On Indian Banks
Nomura Research hosted ICICI Bank Ltd. and Kotak Bank Ltd. at its U.S. virtual corporate day. Here are the key takeaways:
ICICI Bank:
Expect tight liquidity, and rate cut in/after Q4FY25.
Deposit rates and margins are stable.
Loan growth in unsecured retail to moderate.
Some improvement in pricing on corporate.
Kotak Bank:
Deposit mobilisation a challenge, but no challenge to loan growth.
Gradual moderation in margins going forward. Margins to normalise to pre-Covid level.
Expect cost ratios to moderate.
Unsecured currently at 11.6% to rise to mid-teens.