Relatively lower LDRs and real positive deposit rates (as inflationary pressures ease off) should boost deposit growth and hence, credit growth in FY16. On a lower base of FY15, our bottom-up analysis suggests credit growth may pick up in the range of 14-18% in FY16, said Religare Institutional Research.
"While asset quality trends affect banks' price performance in a down cycle, core operational metrics such as liability franchise may gain greater significance as the cycle turns. Private banks and larger PSUs like SBIN and BOB have maintained/improved their CASA base over the past decade, which would help them once the credit cycle picks up," it added.
Transition to Basel III is likely to entail an external capital requirement of Rs 2 trillion for our coverage stocks (7 PSUs and 5 private banks) through FY19, a bulk of which is likely to be driven by PSU banks due to their lower profitability. Private banks along with their larger PSU counterparts such as SBIN and BOB are better cushioned owing to higher capital efficiency, Religare opined.
"Elevated interest rates may continue to impact asset quality in the near term. However, the stress is likely to abate in FY16, driven by a pickup in GDP, lower inflationary pressures, softening interest rates and improving corporate profitability,'' Religare added.
Lower competitive intensity along with a likely macro recovery should drive a pick-up in vehicle sales benefitting retail NBFCs. Despite the recent run-up, gradual improvement in asset quality is likely to further boost sentiment for power NBFCs.
Current P/E valuations for private banks are nearly 1SD lower than their 7-year mean. Valuations could trend towards their long-term averages as economic concerns abate. For PSU banks, this argument is relevant where capitalisation levels are strong, viz. for State Bank of India and Bank of Baroda, it said.
''We upgrade ICICI Bank to Buy and maintain HDFC Bank, State Bank of India and ICICI Bank as top picks. Shriram Transport Finance, Power Finance Corporation, Rural Electrification Corporation are our preferred picks among NBFCs," Religare added.
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