Banking stocks remain attractive in a high rate regime; See Motilal Oswal’s 4 top picks from the region

Growth prospects of the banking sector are bright as credit demand remains strong despite rising interest rate scenario, thanks to revival in the economy. Analysts say the banking sector is likely to benefit from increased margins as it defers rate hikes through floating rate loans as well as rate hikes for deposits.

The ongoing monetary tightening is expected to benefit banks that have a higher mix of floating-rate books.

“Lending rates for banks have been on a steady rise over the past few months with an increase in the repo rate. Banks with a high mix of floating rate book will benefit from continued monetary tightening,” the brokerage said. Strong Motilal Oswal Financial Services,

The RBI increased the repo rate by another 35 bps in the last policy meeting on December 7, 2022 and maintained the withdrawal of its ‘accommodative’ stance to keep inflation under control.

Motilal Oswal expects a further hike of 25 bps in February 2023 and the terminal policy repo rate to be around 6.5 per cent.

While interest rates have been rising, there has been a slower growth in deposit rates.

As highlighted by the brokerage firm, the weighted average fixed deposit rates (WATDR) increased by 13 bps month-on-month (MoM) and 59 bps from April 2022 to 5.62 per cent in November 2022.

Motilal Oswal believes that as the competition to raise deposits intensifies, deposit rates will rise further, leading to a rise in funding costs. Motilal Oswal said, however, that banks with high LCR and healthy CASA mix can accommodate the rise in deposit rates and are thus better positioned to face the challenges posed by rising cost of funds.

Motilal Oswal said, “We expect the net interest margin (NIM) to improve in the near term, while keeping an eye on margins in FY2024. Our top picks are Axis Bank, ICICI Bank, SBI and Federal Bank.”

Ajit BanerjeeChief Investment Officer, Shriram Life Insurance pointed out that the banking sector has the strongest balance sheet in the last 10 years, especially in terms of credit cost ability.

The risk-reward looks attractive with the potential for upgrades and rerating, he added.

“Banks with strong liability franchises and large branch networks will benefit more from sustaining deposit growth in a rising rate environment,” he added.

Apoorva SethSamco Securities, head of Market Perspectives & Research, believes that banking stocks will continue to be a favorite in calendar year 2023.

“Best asset quality in a decade, significant improvement in capital ratios, strong credit demand, and improvement in customer quality have aided in the first phase of re-rating. The next phase of re-rating will be driven by its continued improvement ” increase in quarterly performance and profitability,” Sheth said.

half of RBI financial stability report (FSR) Published on December 29, Governor Shaktikanta Das said the domestic banking system was robust and well capitalised. According to him, banks are adequately equipped to withstand severe stress situations, if they materialise.

reserve Bank of India The gross NPA ratio of banks has come down to a 7-year low of 5 per cent. Going forward, the RBI believes that the gross non-performing assets (GNPA) ratio could further fall to 4.9 per cent in September 2023.

On the other hand, the provisioning coverage ratio (PCR) has been rising steadily since March 2021, reaching 71.5 per cent.

Meanwhile, bank deposits strengthened in the December quarter of the current financial year due to increase in interest rates in the last three months. Peppermint Report good.

HDFC Bank reported 20 per cent deposit growth from a year ago. Yes Bank registered a deposit growth of 15.9 per cent as compared to an advance growth of 11.7 per cent over the previous year. IndusInd Bank, CSB Bank, Federal Bank, RBL Bank and AU Small Finance Bank registered double-digit deposit growth, exceeding the 10 per cent deposit growth of the sector, the report said.

Brokerage firms expect better performance from banking sector third quarter, The trends in deposits, NIM and NPAs will be in focus for investors.

As per recent media reports, the net profit of Public Sector Banks is estimated to reach a milestone 1 lakh crore by the end of the current financial year.

Disclaimer: The views and recommendations given in this article are those of individual analysts and broking firms. These do not represent the views of MintGenie.