Bank stocks to consolidate till margins start improving, says InCred Equities; recommends HDFC, ICICI Bank, SBI

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Also Read: Stocks to buy: NCC, Talbros Automotive among three fundamental stock picks by HDFC Securities “Banks will choose better yield retail lending over tightly priced corporate loans to utilize the available liquidity at an optimum level. We believe RoA for private banks has peaked out, resulting in a consolidation phase for stock prices, which should stay till spread expansion materializes," said InCred Equities analysts Jignesh Shial and Rishabh Jogani in a report. The analysts believe public sector banks (PSBs) are better placed on the liquidity front compared to private sector banks with their lower loan-to-deposit ratio (LDR) and higher liquidity coverage ratio (LCR).

“We believe the margin pressure for a couple of quarters is inevitable for all banks, until the policy easing cycle starts. Even after that, immediate relief is difficult, because the decline in lending rates would be faster compared to the repricing of deposit rates due to a higher share of variable-rate loans in the system," the brokerage report said. It also expects a limited improvement in credit costs from here on, as the best of the asset quality cycle is already behind.

“This will ensure a gradual decline in RoA for banks and would be weighing over their valuation premium. We should see a consolidation phase for stock prices in the banking sector till the margins start witnessing an improvement," said the brokerage firm. Also Read: Indian stock market: Why you should have SBI, HDFC Bank shares in your stock portfolio? Post-correction, InCred equities believes HDFC Bank trades at an attractive risk-reward ratio amid the growth granularity and pricing power.