SBI, ICICI Bank, IndusInd Bank, Axis Bank share prices today: Valuations imply strong mid-term recovery says Nomura

Nomura highlights that the Nifty bank index has outperformed the broader Nifty index, by a staggering 14% since March 2020 lows and 7% since the beginning of CY21. The outperformance, since March 2020 lows, is dominated by Indusind Bank (110% outperformance over the Nifty index), Axis Bank (40%) and ICICI Bank (23%).

In Nomura’s coverage, they prefer Axis Bank, ICICI Bank, IndusInd Bank and State Bank of India on the merits of a recovering economy. Nomura's other Buy-rated stock is HDFC Bank.

Nomura highlights that the Nifty bank index has outperformed the broader Nifty index, by a staggering 14% since March 2020 lows and 7% since the beginning of CY21. The outperformance, since March 2020 lows, is dominated by Indusind Bank (110% outperformance over the Nifty index), Axis Bank (40%) and ICICI Bank (23%).

Post the recent strong rally, the implied medium term growth obligation reflected in valuations have now reached historical levels. As a result, valuation multiples for large cap banks are pricing in a normalized medium term growth. However, consensus forecasts for midcap banks still suggest decent headroom for re-rating.

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Near-term looks supportive, procyclical businesses tend to outperform:

However, stock returns are seldom linear, and more so for banks - which are pro-cyclical in nature. Nomura earnings estimate typically overshoots the consensus expectations, aided by recovery in loan growth, improvement in NIMs and lower credit costs. In consonance, near-term valuation multiples do tend to overshoot the implied medium-term profitability anchors. Some of this is already reflecting in earnings upgrades. On average, FY22F EPS saw 4.2% upgrade in the last 4 weeks, compared to 7.6%over the past three months.

In Nomura’s coverage, they prefer Axis Bank, ICICI Bank, IndusInd Bank and State Bank of India on the merits of a recovering economy. Nomura's other Buy-rated stock is HDFC Bank.

Present value of growth opportunity (PVGO):

PVGO as a percentage of market capitalization, which reflects medium-term growth opportunity implied in the stock price, suggests most banks are fairly valued, barring the midcap banks.

Medium-term RoE:

Nomura reverse residual income model also suggests some of the midcap banks’ medium-term RoEs, implied in current prices, are well below the consensus forecasts for FY23.

What could go wrong?

Weaker loan growth and NIMs are risks assuming the better than expected asset quality guidance is maintained by banks.

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