Whalesbook
Attractive Valuations Drive Picks
Macquarie analysts have selected HDFC Bank and ICICI Bank as their preferred choices in India's banking sector. This comes as the sector is expected to face significant pressure on profit margins soon. The firm noted particularly attractive stock prices: HDFC Bank is trading at 1.87 times its book value, a level not seen in over a decade, while ICICI Bank is at 2.7 times book value, its lowest since early 2022.
Sector Challenges and PSU Bank Risks
Suresh Ganapathy, Macquarie's head of financial research, said these attractive stock prices are the main reason for favoring HDFC and ICICI. Macquarie also likes HDFC Life and SBI Life insurance companies for similar valuation reasons. However, Ganapathy warned that Public Sector Undertaking (PSU) banks could see slower loan growth because of difficulties gathering deposits. He added that asset quality risks might appear, depending on wider economic conditions, which would make challenges for these state-run banks even greater.
Deposit Shortfalls Fuel Margin Squeeze
Banks are struggling with a persistent issue: slow deposit growth. There aren't enough low-cost Current Account and Savings Account (CASA) deposits. This forces banks to borrow money at higher interest rates from the market to manage liquidity needs. This borrowing drives up costs and squeezes profit margins. Ganapathy expects most banks will face a difficult period for margins, with figures likely to be flat or slightly lower.
Outlook for Early 2026
For the January-March quarter of fiscal year 2025-26, India's banking sector is set for pressure on both profits and margins. Even with these difficulties, Macquarie's research suggests valuations for large private banks will still be attractive. Public sector banks, however, are likely to post weaker results for the fourth quarter. This is due to factors like losses on investments (treasury losses) and tight liquidity, which limit their operational choices.