Kotak sees India bank re-rating on resilient asset quality. Loan growth may stay moderate. Valuations attractive. Foreign inflows may not boost credit. Overweight private banks.
Alpha Score of 43 reflects weak overall profile with moderate momentum, weak value, weak quality. Based on 3 of 4 signals — score is capped at 90 until remaining data ingests.
India's banking sector could see a re-rating as asset quality holds up. Loan growth is likely to stay moderate, according to Kotak Institutional Equities.
Asset quality is not a near-term worry. Both public and private sector banks are expected to report lower slippages. Banks may increase coverage buffers as they shift to expected credit loss norms, the report said.
"Valuations remain attractive despite recent outperformance, with scope for multiple expansion and earnings compounding," Kotak wrote.
Retail loan quality has improved compared to FY23 and pre-COVID levels, helped by tighter underwriting since FY24. Unsecured lending should see the sharpest improvement after prior stress, the report added.
Loan demand is uncertain. Kotak said foreign fund inflows could lower banks' cost of funds by reducing their reliance on deposits. That may not translate into stronger credit growth. "We are a bit skeptical about the loan demand situation and believe that the strong flow of foreign funds is likely to reduce the cost of funds as it would lower demand for deposits than boost loan growth," the report said.
MSME loans could face stress if an economic slowdown drags on. Kotak sees no widespread risk, citing government guarantee schemes like ECLGS and CGTMSE. Large corporate borrowers remain stable, and banks are comfortable extending credit despite sectoral uncertainties.
The benefits of improving funding conditions will vary by bank growth strategies. Kotak's overall view is constructive. "We see scope for multiple expansion alongside steady earnings compounding. Within this context, we maintain a relative overweight stance on frontline private banks," it said.
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