Indian Banking Sector - Rerating Opportunities Amongst Undervalued Large Cap Banks: Systematix

Systematix Research Report

Analysis of bank valuations reveal that large cap banks are trading at decadal low premium to public sector banks (excluding of State Bank of India) and smaller private banks.

Since October 2022, large cap banks have been broadly flat whilst the smaller cap PSU banks have returned a whopping 80%. Even the small cap private banks have outperformed large cap banks by 22% (despite addition of mkt cap of HDFC Ltd. post-merger).

Q2 result analysis indicates that the price multiples, post re-rating, of smaller private and PSU banks captures the idiosyncratic improvement in their return ratios and further re-rating would be contingent on stabilization and improvement of these ratios.

Hence, we recommend a switch to large cap banks with our pecking order of HDFC Bank Ltd., ICICI Bank Ltd., Axis Bank Ltd., SBI and Kotak Mahindra Bank Ltd.

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