Financials - Earnings Outlook Healthy; Maintain Preference For ICICI Bank, SBI: Motilal Oswal

Motilal Oswal Report

CY23 would have been a muted year for the banking sector but for the recovery in the last two months, which enabled the sector to deliver 12% returns despite several macro concerns, such as high interest rates, geopolitical events, and regulatory tightening by the Reserve Bank of India.

In this small note we reflect on the stock performance, foreign institutional institution flows, overall profitability indicators, and trends in consensus earnings per share for the banking sector in CY23.

We believe that considering pristinse balance sheets and steady profitability ratios, the current valuations in the banking sector still appear reasonable and the sector is well poised to deliver double-digit returns in CY24, though we will keep an eye on near-term progress in margins and liability growth.

The changing narrative on interest rates across the globe and steady economic progress — with India sustaining its growth dominance will present a multitude of opportunities for the sector to benefit from in the medium term.

Asset quality remains steady; however, the trend in unsecured retail and micro, small and medium enterprise segments will be critical for banks to keep credit costs in check. As a result, we expect sector returns in CY24 to be broadly comparable to underlying return on equity.

Top ideas: ICICI Bank Ltd,, IndusInd Bank Ltd., State Bank of India, City Union Bank, and Union Bank of India.

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