UBS in its recent note mentioned that Bank Nifty Index is up 12% YTD while the Nifty was Flat YTD. According to UBS, banking stocks were trading above their 10-year averages price to book value (PBV). UBS compared the current situation with the previous upcycles to assess upside/downside risks for banks.
According to the note, the near-term positives seemed priced in the recent rally and remains constructive over the medium term due to strong fundamental tailwinds from accelerating loan growth, rising margins which are at historical highs and benign asset quality which was close to historical lows. UBS prefers banks with a higher share of retail funding and reasonable valuations.
They mentioned in their report that compared to the last 6-7 years, healthier State-owned enterprise (SOE) banks would add to competition in mortgage, large corporates and retail deposits, and potentially cap system profitability.
UBS expects ROE for their coverage universe to expand further in FY24 to an average of 14.6%, however it would still be lower than the peak levels of 15.7% seen in previous upcycles. UBS has raised their loan growth and margin assumptions while cutting credit costs in FY23-24. As a result, they have raised FY24E EPS by 0% to 11.5% for banks under their coverage.
On valuations front, UBS mentioned that given the recent rally in stocks most of the positives were captured in current prices but they were still not expensive. UBS has raised price targets by 5-25% of stocks under their coverage, as they roll over estimates to FY24 and also incorporate EPS changes.
According to their proprietary macro model, current valuations are in neutral zone suggesting little near-term upside. The note further added they remain positive on the sector due to strong fundamental tailwinds. Key downside risk to their estimates would be macroeconomic deterioration. UBS prefers SBI, AXIS and HDFC Bank in their coverage of stocks.
