HDFC Bank, ICICI Bank, SBI among top banking picks as analysts say most negatives already priced in

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Sharekhan by BNP Paribas, tight liquidity conditions are creating a challenge for the banks to mobilise deposits. Additionally, a higher credit-deposit ratio is also creating a challenge to sustain loan growth at healthy levels. However, most negatives could be priced in for the banking stocks.

There is no demand-side constraint for the loan growth. Thus, the focus is more on deposit growth as it would have a bearing impact on loan growth and NIMs (net interest margins) in the coming quarter, Malani observed. Notably, banks' asset quality outlook remains stable despite concerns raised on the unsecured segment.

Also Read: Sensex at 74,000! A look at its journey from 1,000 in 1990 to current level Malani believes the return ratios of banks are unlikely to reverse meaningfully in the near to medium term. Malani expects a gradual credit cost normalisation but its impact could be manageable unless there is a sharp macroeconomic downturn. Moreover, additional contingent provision buffers, a higher PCR, higher capital buffers, and lower stressed assets augur well for the banking sector’s outlook.

"Valuations are reasonable versus the sustainable RoE (return on equity) trajectory over nearly 15 per cent in the near to medium term. Top preferred picks are ICICI Bank and Axis Bank among large private banks and IndusInd Bank and Federal Bank among mid-tier private banks. Within public sector banks, SBI, Bank of India and PNB remain our top preferred picks," said Malani.