SBI, IndusInd Bank and ICICI Bank are Jefferies top stock picks in banking sector. Here's why

Foreign brokerage Jefferies said India had its Credit Suisse like AT-1 bond issue around Covid when YES Bank wrote-down AT-1 bonds, but local bond market investors today are not really seeing risks for Indian stocks. Indian banks, it said, has higher share of retail deposits and lower asset and liability management (ALM) gaps. There is lower risk from mark-to-market (MTM) losses and asset quality, adding that valuations in some banking stocks are below Covid lows.

IndusInd Bank, ICICI Bank and SBI are Jefferies' top stock buys, with price targets that suggest up to 55 per cent potential upsides. Overall, it has price targets that suggest up to 69 per cent potential upside for banks under its coverage.

"Valuation of Indian banks is looking fairly attractive and in some cases stocks trade below the levels during the height of Covid risk. Stocks above $5 billion in market cap that are trading below the Covid-low valuations are Kotak Bank, ICICI Prudential Life, ICICIGI and HDFC Life. ICICI Bank, IIB and SBI are top bank picks; BAF, Chola among NBFCs. Life insurers are also attractive but clarity on taxation of insurance policies will be key to rerating," it said.

Jefferies said Indian financials have also borne rub-off effect of global dislocations.  They are better placed with higher share of retail deposit, limited ALM gap & MTM, limited dependence on AT-1 bonds & lower exposure to riskier segments like promoter/acquisition finance, Jefferies said on Tuesday. 

Post recent correction, valuations of some of the domestic financial stocks are near or below Covid lows, it said, adding that valuation premium of Indian financial stocks over emerging market financials is also near 3-year low and long-term average.

Jefferies said while equities and global bonds saw pressure off late, the local bond market is stable. It said the deposit profile of Indian banks is highly dependent on household deposits that form over 60 per cent of total sector deposits. Banks have also been increasing focus on this segment to granularise deposits. ALM gaps also limited.

Jefferies said since YES Bank's case, AT-1 issuances have been lower and the market has become polarised towards larger, quality banks. Among banks, top-3 issuers are SBI, HDFC Bank and Canara Bank with PSU banks having higher contribution from this. Smaller banks, it said, have a lower contribution from AT-1 bonds.

Besides, loans form 65 per cent of domestic banks while investments accounts for the about 25 epr cent. Held-to-maturity (HTM) is allowed on GSecs and form 80 per cent of that and 15 per cent of assets.

"On 4-5 year duration, impact will be just 6 per cent of capital for private banks and 15 per cent for PSUs. Asset quality trends were strong, with slippages during 3QFY23 at multiyear low of 1.6 per cent & recoveries from past NPLs helping to keep credit costs low at 1 per cent of average loans," it said.

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