BofA-ML's Favourite Banking Stocks to Ride Modi Optimism

Bank of America Merrill Lynch (BoAML) has increased its target price for some banking stocks by 10 to 45 per cent, on expectations that a strong mandate for the Narendra Modi-led government will help kick-start the investment cycle.

BoAML expects loan growth to rise to 17 per cent by FY16, led by better lending to corporate and infrastructure projects. "A stable government is more likely to facilitate progress on stalled projects and create a more enabling environment for stressed companies to raise equity," says BoAML in a report. It believes the credit cycle to improve which will result in improved asset quality for banks and result in lower slippages for banks in FY15 compared to FY14. As per RBI data, loan growth was 14 per cent in FY14.

Economists at BoAML expect economic growth to recover to 5.4 per cent in FY15 and 6.5 per cent in FY16.

BoAML says in last ten years private banks on an average traded at two times their book value and it could get re-rated to 2.5 to 3 times their book value. In case of public sector banks, the price-to-book multiple could get re-rated to 1.8 to 2.2 times, as compared to last ten years average of 1.5, BoAML adds.

In the private bank segment, its top picks remain ICICI Bank, Axis Bank and Yes Bank whereas in the PSU segment Bank of Baroda, Punjab National Bank and State Bank of India.

For ICICI Bank it has revised the target to Rs 1,850 from earlier target of Rs 1,525, whereas for for Axis Bank and Yes Bank it has revised the target price to Rs 2,250 and Rs 700 respectively compared to Rs 1,825 and Rs 550 given earlier.

Here is the list of revised target price for banks given by BoAML.