Goldman Sachs has expressed a bullish outlook on India’s private banks, suggesting that they are currently undervalued compared to public sector banks (PSBs), and indicated that private banks have been gaining market share and outperforming PSBs in terms of fundamentals.
Goldman Sachs analysts believe that the recent market corrections present opportunities to invest in private banks, highlighting strong fundamentals such as healthy credit growth and improving asset quality.
Following are the two large-cap bank stocks that have received ‘buy’ recommendations from the domestic brokerage firm Axis Direct with a potential upside of up to 22 percent:
Kotak Mahindra Bank Limited
In Wednesday’s trading session, the shares of one of India’s leading financial services conglomerates surged by 0.7 percent on BSE to Rs. 1,780.6, as against its previous closing price of Rs. 1,769.35, with a market cap of Rs. 3.4 lakh crore.
The brokerage firm Axis Direct has given a ‘buy’ recommendation on Kotak Mahindra Bank (KMB) with a target price of Rs. 2,040 per share, representing a potential upside of nearly 17 percent from the current trading price of Rs. 1,745.65.
Following a stake sale in its general insurance (GI) subsidiary that had a one-time impact, Axis Direct has revised its earnings forecast upwards by approximately 18 percent for FY25E, while maintaining a stable outlook for FY26E estimates.
Reason behind the target
Axis Direct predicts that KMB will achieve a CAGR of 17 percent in advances, 15 percent in net interest income (NII), and 11 percent in earnings growth from FY24 to FY27E.
Post Q1 FY25 results, the brokerage valued the bank’s core book at 2.4 times FY26E Adjusted Book Value (ABV), up from the current valuation of 2.9 times FY26E ABV and assigned a value of Rs. 515 to the subsidiaries, resulting in a target price of Rs 2,040 per share.
Axis Direct revised its projections following Q1 FY24-25. For FY25 and FY26, the brokerage now expects growth in key financial metrics: NII is projected to decrease by 0.7 percent and increase by 0.4 percent, respectively; Pre-Provision Operating Profit (PPOP) is anticipated to grow by 1.5 percent in FY25 and 2.9 percent in FY26; and net profit is forecasted to grow by 18 percent in FY25 and 18 percent in FY26.
Despite constraints on the growth of unsecured business segments like credit cards and personal loans due to RBI regulatory restrictions, the brokerage expects the bank to focus on increasing its presence in corporate and secured products, which are experiencing continued demand.
As per the management, margin pressures and increased operating expenditure (Opex) are expected to restrict KMB’s Return on Assets (RoA) to 2.2 percent over FY25-27E.
The key risk to the brokerage’s estimates remains in a potential slowdown in overall credit growth, which could disrupt the bank’s earnings trajectory. Additionally, while management’s focus on expanding the unsecured portfolio could support margins, it also poses risks to asset quality.
The stock has delivered negative returns of around 8 percent in the last one year as well as nearly 8.5 percent returns year-to-date.
About the company
Incorporated in 1985, Kotak Mahindra Bank Limited provides a wide range of banking and financial services to corporate and individual customers in India.
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HDFC Bank Limited
In Wednesday’s trading session, the stock surged by 0.2 percent on BSE to Rs. 1,621, as against its previous closing price of Rs. 1,618, with a market cap of Rs. 12.11 lakh crore.
Axis Direct has given a ‘buy’ recommendation on HDFC Bank with a target price of Rs. 1,950 per share, representing a potential upside of 22 percent from the current trading price of Rs. 1,597.8.
Reason behind the target
The brokerage trimmed its advances growth estimates by nearly 2-4 percent over FY25-27E, factoring in a slowdown in credit growth amidst challenges on deposit mobilisation. Consequently, adjusting for slower growth and a gradual improvement in Net Interest Margins (NIMs), Axis Direct has reduced its earnings estimates by 5-6 percent for FY25-26E.
However, post Q1 FY25 results, the brokerage values the bank’s core book at 2.4 times FY26E ABV, up from the current valuation of 2.2 times FY26E ABV and assigned a value of Rs. 220 per share to subsidiaries, resulting in a revised target price of Rs. 1,950 per share.
Despite a disappointing Q1FY25 in terms of growth, the management is optimistic about a recovery in the upcoming quarters. The bank’s focus on deposit-led credit growth would suggest a slowdown in credit growth momentum.
But, HDFC Bank’s commitment to pursuing profitable growth is expected to improve its RoA in the medium term. Continuous growth in deposits and improvements in Net Interest Margin (NIM) are crucial factors that could lead to a higher valuation for the bank.
The main risk to the brokerage’s forecasts remains a potential slowdown in overall credit growth if the bank fails to mobilise deposits effectively, which could disrupt its earnings trajectory. Furthermore, a slower transition from higher-cost debt to lower-cost deposits could continue to impact margins negatively.
The stock has delivered negative returns of around 4.6 percent in the last one year as well as nearly 6 percent returns year-to-date.
About the company
HDFC Bank Limited is engaged in the business of providing a wide range of banking and financial services including retail banking, wholesale banking and treasury operations.
Written by Shivani Singh
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