Why This Foreign Brokerage Is Long On Indian Banks

Indian banks set for a period of healthy growth and profitability, according to Bernstein Research.

<div class="paragraphs"><p>An HDFC Bank branch in Mumbai. (Source: BQ Prime) </p></div>
An HDFC Bank branch in Mumbai. (Source: BQ Prime)

The stage is set for a period of healthy growth and profitability for Indian banks, according to Bernstein Research. Healthy credit demand, rising margins, and benign credit costs will be the key enabling factors for this period, it said in a report.

Among the banks rated by Bernstein, it remains strongly in favour of HDFC Bank Ltd. The bank has "the best deposit franchise and has the potential for significant operating leverage ahead", Bernstein analysts wrote in the report.

At a sectoral level though, strong deposit franchises are likely to differentiate winners in the sector as opposed to underwriting quality, which ruled the roost over the past decade, the report noted.

Benefits of scale are also likely to become more prominent going forward and digital channels—instead of causing disruption—will be commoditised, it said.

Bernstein's Assessment

HDFC Bank's scale and deposit franchise will be the wind in its sails, Bernstein said. The stock is also currently valued at a sharp discount ahead of its merger with Housing Development Finance Corp. Ltd. The discount is unwarranted and set to reverse quickly, the brokerage said.

In case of Axis Bank Ltd., there are visible green shoots of a turnaround evidenced by gains in deposit share and closing gap with peers on net interest margins. Successful integration of Citi's portfolio and an equity capital raise at a reasonable valuation would be near-term catalysts for the lender.

State Bank of India remains an exception among public sector banks, as it has managed to retain market share over the last decade. The value of its stake in subsidiaries like SBI Cards and Payment Services Ltd. and SBI Life Insurance Co. also provides a value unlocking opportunity.

Kotak Mahindra Bank Ltd. is a bear market star, losing lustre in a bull market, Bernstein said. With large peers expanding scale at pace, the gap might become too wide to bridge. The brokerage expects the upcoming CEO transition to be smooth.

India's second largest private sector lender ICICI Bank Ltd. is a clear turnaround story with a rebound in deposit growth and a loan book shift towards the retail segment, Bernstein said.

Higher profitability would be challenging given the limited room for increasing share of retail loans any further, it said.