India’s banking sector is entering 2024 on an upbeat note after a solid performance in 2023, with analysts betting on further upside thanks to reasonable valuations, strong credit growth, and banks’ focus on controlling costs.
In their latest sector report, Jefferies analysts said valuations of bank stocks “look reasonable” even after outpacing the broader market and emerging market financials last year. They expect the valuation gap between private and public sector banks to narrow as their performance converges.
Healthy Credit Growth and Uptick in Capex to Support Banks
The analysts forecast around 15% credit growth in 2024, more broad-based across segments like small businesses, housing and early signs of an investment revival. After growing faster than GDP in 2023, the “credit multiplier” effect is seen persisting next year.
Banks are likely to identify new lending opportunities to fund corporate capex as demand gradually recovers. Analysts note banks have been risk-averse on large tickets loans lately due to previous bad loans. Participating in capex financing will be key even if selectively.
With lending rates having jumped in 2022-23, consumer demand for personal loans could moderate. But the RBI’s measures to slow personal loans are unlikely to choke overall system liquidity.
Deposits Competition, But Cost Control to Aid Profits
The tight liquidity environment means banks will continue fighting fiercely for retail deposits in 2024. But easing inflation could improve the situation.
To offset margin pressures, banks will accelerate cost-cutting, especially after significant technology investments in recent years. Analysts see operating expenses slowing from 23% growth in FY24 to 13% in FY25 for private banks.
This, along with low credit costs will enable banks to deliver healthy pre-provision operating profits next year.
Asset Quality Resilience to Persist; Capital Needs Limited
India’s banks have seen asset quality hold up well so far despite concerns. Analysts expect some normalization in credit costs in 2024-25, but not a sharp spike.
Capital needs are also seen limited for most banks due to strong internal accruals. The well-capitalized balance sheets should support medium-term loan growth of 15-16% without much need for equity infusions.
Top Stock Picks for 2024
Here are some of the top banking stock picks for 2024 from the Jefferies report:
Axis Bank
- Among the best placed to ride India’s credit pickup
- Retail liability momentum and asset yields helping NIMs
- Cost control and lower credit costs adding to profit growth
ICICI Bank
- Strong balance sheet to tap growing corporate loan demand
- Digital initiatives boosting low-cost deposits
- Valuations reasonable despite outperformance
SBI
- Market leader well positioned as economy rebounds
- Higher-yielding retail loans compensating for NIM dip
- Outperformer among PSU banks fighting inflation
IndusInd Bank
- Rapid growth in high-margin consumer loans
- Liability and asset pricing power helping profitability
- Past asset quality issues firmly behind; growth rebound ahead
So in summary, India’s leading banks are on a strong wicket entering the new year, aided by a conducive economic environment. Their healthy finances and focus on risk management makes the banking space an attractive bet for investors in 2024.