Banking Sector Performance: Emkay Global’s Target Prices and Key Insights

Synopsis: Major private sector banks like ICICI Bank, Axis Bank, HDFC Bank, and Kotak Mahindra Bank faced substantial sell-offs due to market weakness. Emkay Global forecasts that slowing credit growth, margin pressures, and rising credit costs could dampen earnings, particularly for private lenders. Despite these concerns, ICICI Bank remains Emkay’s top pick due to its robust growth trajectory and high provisioning. HDFC Bank and Kotak Mahindra Bank continue to maintain strict credit underwriting standards, while Axis Bank focuses on secured loans. Public sector banks like SBI and Indian Bank are also preferred by Emkay for their limited retail exposure. The overall retail credit growth has moderated due to regulatory actions and asset quality concerns in unsecured loans.

The Indian banking sector witnessed a wave of volatility as major private lenders, including ICICI Bank, Axis Bank, HDFC Bank, and Kotak Mahindra Bank, saw significant sell-offs amid broader market weakness. On Monday, shares of ICICI Bank fell by 2.41% to Rs 1,275, leading losses in the BSE Bankex. Other major players like Axis Bank, HDFC Bank, and Kotak Mahindra Bank also faced declines of up to 2.5%. Public sector banks such as State Bank of India (SBI) and Canara Bank also faced minor setbacks, shedding around 1%.

Emkay Global's Perspective

Brokerage firm Emkay Global has highlighted concerns regarding slowing credit growth, margin contraction, and rising credit costs, which are expected to weigh on the earnings growth of banks, especially private lenders. Despite these concerns, ICICI Bank stands out as Emkay’s top pick in the private banking space due to its better growth trajectory and robust provisioning, which is expected to help it deliver a healthy return on assets (RoA) between 2-2.2%, even amid a challenging margin environment.

HDFC Bank and Kotak Mahindra Bank have shown resilience with consistent credit underwriting standards, avoiding the pitfalls of aggressive growth. Axis Bank, on the other hand, has focused on secured loans, particularly in the housing and loan-against-property segments, to sustain its growth. Emkay Global also believes that IndusInd Bank might benefit from a potential rate-cut cycle, given its substantial fixed-rate book exposure.

Among smaller banks, Karur Vysya Bank (KVB) and Federal Bank are preferred for their solid growth trajectories and strong RoA performance. For public sector banks, Emkay favors SBI and Indian Bank due to their limited retail exposure.

Challenges in the Banking Sector

Systemic retail credit growth has moderated to around 14%, with regulatory pressures and concerns over asset quality in unsecured loans, particularly personal loans in the range of Rs 3-5 lakhs, weighing on the sector. Growth challenges have been more pronounced in southern and northern regions, as noted by Emkay.

Outlook for Large Private Banks

Emkay Global predicts that large private sector banks, including ICICI Bank, Axis Bank, and IndusInd Bank, will be key beneficiaries of any growth revival in housing and vehicle financing. However, managing deposit growth will likely be a priority for HDFC Bank in early 2024 before the bank pushes for more aggressive growth.

Disclaimer: The information provided is based on analysis from brokerage firms and is intended for informational purposes only. Investors should consult certified financial advisors before making investment decisions.