3 corporate bank stocks analysts are bullish on

Retail banks have lorded over the entire banking sector for over a decade. However, now these are expected to pass on the baton with the cycle turning in favour of corporate banks. Here is why investors should gear up for rotation within the banking space.The past decade has proved to be very turbulent for banks. With a broader economic slowdown, credit growth decelerated from 22% in 2000-10 to a measly 12% in 2010-20. Further, the asset quality review of the banking system by RBI uncovered the underlying stress in balance sheets. Banks had to step up provisioning against bad assets, which hurt profitability. Events like demonetisation and the ILF&S crisis aggravated the stress.In this backdrop, the banking sector witnessed sharp divergence on multiple fronts. It saw clear value migration towards private sector banks. Further, as corporate banks grappled with NPAs and went about repairing their balance sheets, the profit pool got skewed in favour of retail-centric banks and NBFCs. Contribution of HDFC Bank, Kotak Mahindra Bank and Bajaj Finance to the profit pool expanded from 20% to 50% while that of SBI, ICICI Bank and Axis Bank shrunk commensurately. This reflected in stock performance as well. The retail basket saw its contribution to market cap expand from 29% to 61% of total sector market cap. Consequently, the weights of HDFC Bank and Kotak Mahindra Bank in Nifty increased from 3.9% and 0.9% in 2009-10 to 10.2% and 4% in 2020-21. At the same time, weights of ICICI Bank and SBI contracted.Retail banks have dominated profi t & market cap poolThe tide is now turning in favour of corporate-facing banks.83867531However, analysts say the tide is turning. The adverse corporate asset quality cycle has bottomed out. As manufacturing activity makes a comeback, it will revive growth of industrial credit. “We believe India is at an inflection point and likely to see improved loan growth this decade. This would be led by sustained buoyancy in consumer credit and industrial demand, boosted by capex recovery, as capacity utilization levels improve,” notes a Motilal Oswal report. Corporate loan-oriented banks like ICICI, SBI and Axis Bank that are positioned to cater to industrial demand will benefit disproportionately.These banks have also beefed up their balance sheets by raising capital during the pandemic and emerged stronger in 2020-21. Boasting high provisioning coverage and strong capital ratios, these are now in better shape to reap the gains of coming capex-led cycle. Further, the resolution of stressed accounts may drive healthy provisioning write-backs and aid earnings recovery. “As growth picks up, the earnings momentum of corporate banks coupled with the valuation headroom can serve as twin catalysts for outperformance,” indicate analysts at Motilal Oswal. The report says when the cycle turns, the valuation multiple typically shifts from the lows to high—it doesn’t trade at average multiples of the cycle. This shift in valuation multiple expansion from lows to highs drives outsized gains.HDFC Securities reiterates its preference for strong deposit franchises. ICICI Bank remains its top pick owing to a strong balance sheet (strong deposit franchise and adequate provision buffer), comfortable capitalisation, and consequent ability to disproportionately gain market share. SBI, too, offers an attractive riskreward, especially due to its surprisingly strong asset quality performance. Emkay Global suggests Axis Bank is ready for take-off once environment normalises. “Axis Bank has undergone a major transformational journey, fortified its balance sheet and is now ready to re-accelerate growth, delivering better return ratios,” the brokerage notes.

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