IndusInd, Bandhan Bank offer more value for your buck over larger peers; Jefferies recommends ‘Buy’

Notwithstanding the recent outperformance of small private banks, their average valuations remain attractive over larger private peers. As growth improves their valuations could see a rerating. Jefferies picks IndusInd Bank and Bandhan Bank as its top 'Buys'.

Small banks are trading at a discount to their larger private banks and NBFCs. The average valuation for small private banks is at 1.9X, whereas larger private banks are trading at an average of 2.6X and large NBFCs trade at 5.2X, a Jefferies report said.

Moreover, 30% of smaller banks with a higher share of wholesale deposits and/or higher share of fixed-rated loans are trading at a Price-to-Book (PB) value of 1X-1.5x and another 15% are trading sub 1x. The remaining 55% are trading around 1.5-2x of their PB, the report said. As growth improves, valuations may have headroom for rerating.

"We note that IndusInd Bank, RBL, Yes, Bandhan Bank, AU SFB, Ujjivan SFB, IDFCFirst Bank and Indian Bank have a higher share of wholesale deposits and/or higher share of fixed-rated loans as of FY23," the Jefferies note said.

Jefferies sees problems of higher funding costs in small private banks along with slower loan growth in the back-drop of higher Non-Performing Loans (NPLs), getting resolved going ahead. This could help them deliver better earnings momentum, going forward. These issues had dragged their topline growth versus larger banks and NBFCs, the report noted.

In contrast, larger banks could see a fall in their Net Interest Margins (NIMs) as funding costs rise with a lag whereas their yields have already expanded sharply over the past 2-3 quarters.


Image Caption: Jefferies

Triggers
- The wholesale deposit rates are down 30bps since the last Monetary Policy Committee (MPC) announcements and could ease further as the credit-deposit growth gap narrows.

- Bond yields and CD rates (a benchmark for wholesale deposit costs for banks) have fallen by 30 bps since April, whereas retail deposit rates have been stable.

- Banks with a higher share of wholesale deposit/ fixed rate loans may benefit. Easing interest rates can benefit banks with higher dependence on wholesale funding, a higher share of fixed-rate loans and some Asset Liability Management (ALM) gaps.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)