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2020 Outlook – Profitability surge in the offing
Big is Beautiful; corporate banks re-rating to continue
* CY19 was characterized by ‘stock picking’ as the markets looked to sort the sheep in an uncertain environment. As a result, as many as half the stocks under our banking coverage universe delivered negative returns, even as the Nifty and Bank Nifty were up 12% and 18%, respectively. In fact, only 6 stocks under our coverage outperformed the benchmark with ICICIBC delivering massive returns.
* CY20 has started on a distinctive note with credit growth slumping to 7.1% YoY (lowest in the past 2 years), driving a sharp rise in systemic liquidity (~INR4t). The recent Supreme Court (SC) judgment should expedite the NCLT resolutions even as stress formation continues due to the ongoing economic slump.
* The year is also crucial as two banking stalwarts will hang up their boots after building formidable franchisees. The market had cheered the management change at ICICIBC during Oct’18-Dec’19 as the bank had delivered everything right and is likely to continue doing so in CY20 as well. CY20 will also see significant value unlocking opportunity in subsidiaries (SBI Cards, HDB Financial), thus, further underscoring the importance of SOTP-based valuations for large banks.
* We remain constructive on ICICIBC and SBIN given their strong potential for earnings revival and narrowing RoE gap with retail peers. Amongst mid-caps, we prefer Federal Bank and AUBANK.
Banking market cap at a new high; GDP growth continues to slump
The banking sector’s market capitalization has increased ~23% during CY19 to INR25t even as GDP growth consistently declined to 4.5%. The corporate loan demand, thus, is unlikely to revive in the near term. However, retail growth should remain steady with sustained momentum in mortgage and unsecured segments, and on gradual recovery in the auto segment. Large private banks and SBIN appear well poised to expand market share in retail owing to their ability to competitively fund loan growth.
Large ticket resolutions underway but economic stress remains
The recent SC judgment on Essar Steel should give fresh impetus to the resolution of struck NCLT cases and enable banks to report significant write-backs. However, muted GDP growth and other economic indicators remain a concern. Amongst large corporate banks, ICICIBC and SBIN are relatively well placed, given their high provision coverage, continued normalization in the slippage trajectory and seasoned NPL portfolio, necessitating lower ageing provisions. AXSB, on the other hand, is likely to report elevated slippages in the near term from the BB & below pool.
Unprecedented management changes in Indian Banking
CY20 will be a crucial year as two banking stalwarts credited with building the finest banking franchisees will hang up their boots. This is expected to be overwhelming for the entire banking industry as investors will realign portfolio allocations and prepare for the event. Already, significant activity can be seen in this regard (exhibits 66-68).
Earnings to drive re-rating; trading multiples offer big room for expansion
After reporting sub-optimal performance over the last few years, large lenders are set to recover and report strong profit growth over FY19-22, led by normalization in credit cost, steady margins and healthy loan growth. This is expected to drive further re-rating of these stocks. ICICIBC and SBIN remain are top banking ideas. Amongst mid-sized banks, we prefer AUBANK and Federal Bank given their healthy business growth and in-place drivers for RoA expansion.
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