Brokerage house ICICI Securities has suggested that South based banks are well positioned to register accelerated earnings growth going ahead.
Trading sessions on Tuesday and Wednesday, have already seen the impact of Axis Bank's quarterly results to the overall market direction. On Wednesday, the Axis Bank scrip was trading over 9% south on intra-day on the BSE, adding to woes for investors.
Analysts at the brokerage house believe that South-based private sector banks have better asset quality ratios, with most of them to peak out at current levels. Loan growth too is likely to revive after remaining muted over the past couple of years.
"Niche positioning in the respective home states, expertise in small-ticket loans to the self-employed segment and impeccable relationship-based banking model would ensure higher-than-industry growth for South-based banks. Asset quality improvement for these banks will be aided with strategic shift to retail/SME lending, lack of participation in large consortium-based lending and relatively small stressed-asset portfolios (5/25, SDR, S4A, Standard restructured book, etc.)," shared the brokerage house in a report.
The brokerage house has shared suggestions with coverage reports for banks such as Federal Bank, City Union Bank, Karur Vysya Bank, Lakshmi Vilas Bank, as well as South Indian Bank. A document compiled by analyst Renish Bhuva further states that the South based regional bank operate with a better credit culture.
Of the total five states with more than 100% CD (Cash to Deposit) ratio, three of them are South based states (Tamil Nadu, AP & Telangana) while Kerala with lowest 60% CD ratio offers opportunity for regional banks.
Five year CAGR in loans, Earnings and fresh NPA accretion between FY12-17; Regional banks (covered) are next best to top four private banks with lower fresh NPA accretion and loan growth better than most pan-India banks (ex-top four private banks)
Regional banks namely Federal and LVB have started demonstrating loan growth at par with pan-India banks including fastest growing private banks.
Federal Bank broke the wall, grew outside its home state and stands out as a bank with the lowest home state contribution in total loan book. The highlight of the ICICI report is a Buy/Hold recommendation.
Analysts recommend buying stocks such as Federal Bank, City Union Bank, and Karur Vysya Bank. Federal Bank is estimated to target a price of Rs 147, within a time period of 12-18 months. The bank, by end of trading hours on Wednesday was selling at a price of Rs 126.30 a share.
City Union Bank is forecast a price of Rs 190 in the same time frame. CUB ended the day on BSE at a price of 159.55. Karur Vysya Bank is forecast to reach a price of Rs 150, from the last traded price of 124.15.
