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Indian Bank’s balance sheets are much resilient than they were historically in terms of capital buffer, credit quality, and liquidity, aided by stringent regulatory frameworks. We expect the Global Banking Crisis to have no significant impact on Indian Banking system. Nevertheless, the key investment theme for FY24E will be core earnings performance rather than the parameters of asset quality and capital sufficiency. The credit growth for FY24E is expected to be slower than FY23, however, the deposit growth to shall stay higher amidst intense competition among banks and higher cost of deposits. We have tried to incorporate CAMELS rating (Acronym for Capital Adequacy, Asset Quality, Management Quality, Earnings, Liquidity & Sensitivity) considering all major parameters of the banking sector. The weighted average CAMELS score has been derived with the highest weight of 50% for Earnings; while, Capital Adequacy, Asset Quality, Management Quality, Liquidity and Sensitivity have the weightage of 5%, 20%, 10%, 10%, and 5% respectively. We believe the aggregate score would be a better measure to compare with valuations (P/BV). Factoring CAMELS – score and valuations, we are betting on ICICIB, AxisB, SBIN, and BOB. Among smaller banks, we are bullish on CSB considering high capital, growth trajectory and low stress formation.

Earnings Potential: The operating environment of Indian Banks is likely to stay healthy for FY24E, which may translate into stable ROA despite moderation in credit growth and margin compression. The core earning of a bank is largely a function of advances, NIMs, operating expenses and credit cost. We have incorporated all the major parameters to explain the returns. The credit growth for FY24E is expected to come down v/s the FY23 credit growth (factoring 1.2x credit multiplier). Furthermore, we are very likely to witness NIMs reduction because of rising cost of deposits and minimum benefits of EBLR re-pricing. Nevertheless, ROA is likely to stay stable considering lower credit cost which may counterweight the negative impact of NIMs compression.

Since May-2022, despite several rate hikes, we have witnessed strong credit demand because of higher capex, robust working capital needs and growth in unsecured pockets. The credit and GDP growth stood higher than the M3 growth which signals strong consumer confidence. Nonetheless, we may witness moderate economic slowdown in FY24E (RBI/Govt./IMF consensus). The expected nominal GDP growth for FY24E is around 11% and the credit – multiplier (pre – covid) was around 1.2x. Therefore, we are estimating a system level credit growth of ~13% for FY24E.

For Private Sector Banks, (PVB) we are expecting a loan growth of more than 16% led by HDFCB, ICICIB, KotakMB and AxisB. The large PVBs may try finding retail pockets to grow while PSBs’ growth may stay below sector average as they have large exposure to corporate credit. SBI & BOB are expected to lead PSBs due to their digital initiatives, market penetration and lesser impact on account of the Expected Credit Loss guidelines compared to other state run peers of similar size. Among smaller banks, CSB is likely to outperform the peers factoring higher growth capital and ample liquidity.

The deposit competition (especially retail TD for LCR) is intense among banks. A higher liquidity requirement and CDR bottleneck (majorly PVBs) are likely to boost deposit traction as the lagging deposit re – pricing may increase the cost of deposit across SCBs. PVBs are more prone to deposit re-pricing as the CDR is at threshold level. However, PSBs’ have comfortable CDR level and carrying ample liquidity. In our view, HDFCB is likely to outperform the industry.

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