IndusInd Bank, Federal Bank, BOB, YES Bank gained up to 4% today; what's ahead?

Banking stocks such as IndusInd Bank, Federal Bank, Bank of Baroda (BoB), YES Bank and Axis Bank were trading up to 4 per cent higher in Thursday's trade, even  the BSE Bankex was trading flattish. IndusInd Bank climbed 3.82 per cent to Rs 824.25 after the recent clarification on the MFI portfolio. Federal Bank advanced 1.25 per cent to Rs 202.30. Bank of Baroda, YES Bank and Axis Bank gained 0.5 per cent to 1 per cent.   

Nomura India said the new guidelines on LCR should be more beneficial for banks that have a higher reliance on wholesale funding, as these banks will likely see a higher positive impact on their LCRs due to the eased run-off rates for wholesale funding and lower negative impact from increased run-off rates on retail deposits. 

"As a result, mid-sized banks with relatively weaker deposit franchises (such as IndusInd Bank, AU SFB, Bandhan Bank) should benefit the most. Among the larger banks, continued liquidity-easing measures are positive for deposit-growth-constrained entities (such as Axis Bank, HDFC Bank)," it said.

Nuvama noted that the recent final LCR norms are less strict compared with the draft of July 2024. While they are positive for the entire sector, the key beneficiaries would be Federal Bank, IndusInd Bank and Kotak Mahindra Bank, this brokerage said.

Some brokerages are cautious on the banking sector outlook. Emkay Global said while lenders are enjoying strong regulatory tailwinds – improved liquidity and easing of lending norms, these benefits are likely to peter out soon. This it said is especially true for large banks as they face strong margin pressure due to rate cuts being deeper than originally forecast. 

"The longer-term challenges for banks persist – overall growth remains below the RoE, thus leading to weak BVPS; pockets of excess RoA/RoE continue to be competed away, and fintechs slowly chipping the franchise strengths of incumbents. These are not fully captured in the valuations, despite the severe P/B derating for private banks. We remain underweight and prefer playing the rate cycle via autos and the larger consumer discretionary universe," the brokerage said.

Kotak Institutional Equities said in an uncertain world, an inexpensive valuation can always provide comfort, especially in a cyclical business. It noted that the banking sector is not at cyclical lows that it had tested during Covid or during the corporate NPL cycle. 

"PSU banks have underperformed large private banks in recent times despite no concerns about asset quality. SBI’s outperformance with its public bank peers suggests a general preference to stay with better quality names—a thesis that is worth assessing," the brokerage said.

The brokerage believes that the system credit could potentially grow slower than system deposits going ahead and that asset quality deterioration, despite fears, is unlikely to materialise immediately. 

"This would imply that Axis Bank would be positioned best among the large private banks. SBI is likely to be well-positioned in this leg of the cycle, where concerns are primarily on NIM," it said.