Paytm, SBI, Axis, ICICI, Kotak Bank, HDFC Bank shares: Bernstein sees up to 47% upside. Here's why

Bernstein in its India Financials 2024 outlook note said the positive operating environment for banks will continue this year and therefore, it remains bullish on the sector. The foreign brokerage said the relative performance of the banks would be influenced by five key trends including a revival in corporate credit, potential rate cuts, a potential slowdown in unsecured consumer credit, divergence in deposit growth rates and normalisation of credit costs. Within banks, Bernstein has HDFC Bank as top pick, followed by Axis Bank Ltd, ICICI Bank Ltd, State Bank of India (SBI) and Kotak Mahindra Bank Ltd. Among payment businesses, it prefers One97 Communications Ltd (Paytm) over SBI Cards and Payment Services Ltd.

Bernstein said it is more bullish on the banks against NBFCs. It said the benefits of corporate growth and lower exposure to consumer credit outweigh the margin risk from a rate cut. Within banks, it expects the larger private sector banks to deliver clearly better metrics against larger PSU banking peers and smaller private sector banks.

"We make modest changes to our earnings forecasts (

This is what Bernstein said on banking and financial stocks:

HDFC Bank

With the merger done, the focus will be on the improvement in the quality of RoA led by an expansion in Net interest margins while maintaining growth in line with its peers. HDFC Bank maintaining an incremental LDR in the 80-90 per cent range while managing loan growth in line with peers would be key for investors to believe that the liability mix will gradually be ‘normalized’ to comprise primarily of deposits.

A steady improvement driven by a host of factors including, benefit from the expiry of Incremental CRR requirements, reduction in the RIDF holdings, replacement of ex-HDFC Limited liabilities with cheaper bank liabilities and loan mix changes, would help strengthen the case for a long-term RoA that’s superior to peers.

Axis Bank:

For Axis Bank, the investment thesis rests on the bank closing the gap vs. larger peers and therefore strengthening the case for a re-rating. The bank has made some progress in improving its quality of deposit franchise. The key now would be to maintain that trajectory of improving quality of deposits while closing the gap with peers on the pace of growth in deposits (the banks deposit growth in recent quarters has lagged peers), Bernstein said.

Axis Bank has communicated a target opex to assets ratio of ~2-2.1% but the current opex ratio (2.4-2.6 per cent in recent quarters) is far from that level. The opex trajectory as the bank tries to balance the need to maintain a healthy RoA with the need to continue investing in infrastructure including branch network to close the liability franchise gap with peers will be the key thing to look out for.

A closing of the gap in Axis’s RoA with peers (>20 bps gap now) through improved operating leverage/reduction in drag from RIDF investments etc. will be the other ingredient to close the valuation gap with peers, Bernstein said.

ICICI  Bank

Overall RoA for ICICI remains the highest amongst the large private sector banks and is likely to remain so in the nearterm. The debate is all around the extent of decline (if any) and the duration for which this high RoA can be maintained.

The terminal NIM (assuming no rate cuts in the interim) being not too far from 2QFY24 levels would be a positive, Bernstein said. Given the lower NIM against the peak NIM seen few quarters ago, the RoA could be impacted. But the bank does have several buffers (including provision buffers) that it could use to reduce the RoA decline.  However, that strategy is likely to result in questions on the “quality” or “sustainability” of RoA, Bernstein said.

State Bank of India

Bernstein said SBI had the lowest capital ratios amongst the larger banks and the two recent regulatory changes: increase in risk weight for consumer loans  and change in D-SIB classification of SBI from bucket 3 to bucket 4 add further pressure to the capital ratios. “With changes to provisioning norms also likely to kick in the medium-term, there is an urgent need for capital, especially if the bank has to capture its fair share of incremental credit opportunity,” Bernstein said.

Bernstein said a potential slowdown in consumer unsecured credit and any deterioration in the asset quality in that segment could impact SBI significantly given the high share of unsecured loans and its recent reliance on that segment for both growth and profitability.

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Kotak Mahindra Bank

The key controversies for Kotak Bank would be around the IDBI acquisition. Given the bank has lagged behind peers on branch expansion (and hence high quality deposits), we expect the bank to bridge that gap through an inorganic strategy. With elections set to be completed by mid-year, Bernstein could see some progress on the potential IDBI transaction , which if structured reasonably, could be a positive for the bank.

“Given the overall commentary on unsecured segment, it remains to be seen if the bank continues with its strategy of increasing the share of unsecured loans in the segment. Also, the bank had recently returned back (in part) to its earlier strategy of paying up for deposits - the outcome of that would be important both from a growth as well as profitability perspective,” it said.

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Any signs of worsening of asset quality in the sector (in consumer segment or otherwise) could immediately bring back a big premium to KMB given its underwriting track record and remains an upside risk for the stock, Bernstein said.

SBI Cards

Bernstein said SBI Cards has had seen a deterioration in portfolio asset quality in the last few quarters and consensus estimates assumes a continuation of credit costs near to 2QFY24 levels but no further deterioration. Any further deterioration would be a key downside risk, it said.

With the recent risk weight increase and asset quality concerns causing a slowdown in the growth of small ticket loans from various new entrants (fintechs/NBFCs), the competitive outlook looks better for credit cards. Whether this leads to a revival in the revolver balances remains a key controversy for the stock, Bernstein said.

Paytm

Paytm has seen a sharp correction in the last 1-2 months following the company’s decision to cut down growth in its BNPL product. Bernstein  said a stable asset quality in the BNPL portfolio, as the portfolio is cut down by 40-50 per cent would provide a solid proof of the asset quality of the underlying portfolio. A significant deterioration would bring back questions on the quality of Paytm’s borrowers, it said.

“The journey to the breakeven point: Given the immediate impact of the BNPL slowdown is likely to be minimal, we expect the company to turn profitable this calendar year and that would be an important milestone. Regulatory risks remains the biggest risks for Paytm and any development that hints at a more favorable regulatory outcomes (e.g. Payment aggregator license, Removal of embargo on Paytm payments bank, NBFC license etc.) would be a big catalyst for the stock,” Bernstein said.

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