The Baseline    
04 Oct 2022
Five analyst stock picks from the banking and finance sector
By Suhas Reddy

This week, we look at five analyst picks from the banking and finance sector, which has been in the green over the past quarter.

  1. IndusInd Bank: Sharekhan maintains its ‘Buy’ rating on this bank with a target price of Rs 1,400. This indicates an upside of 19.8%. Analysts at the brokerage believe that “the bank is well positioned to resume on the path of higher credit growth, as it has recovered from past asset quality challenges''. They note that concerns over the bank’s asset quality are fading as its collection efficiencies, liquidity position, and internal costs have been improving for a few quarters. The bank’s credit costs are also expected to fall, and they anticipate a decline of 150 bps annually over FY23-25.

Sharekhan believes IndusInd’s loan disbursement growth will be driven by its vehicle finance, micro-finance and MSME business segments in the coming quarters. Overall, the company’s growth is expected to be broad-based. The analysts are positive about the firm’s foray into new segments such as NRI banking, tractor finance, and affordable housing. They expect the bank’s net profit to grow at a CAGR of  29.5% over FY22-25.

  1. Star Health and Allied Insurance: Motilal Oswal maintains a ‘Buy’ call on this insurance provider with a target price of Rs 830. This indicates an upside of 19%. Prayesh Jain and Nitin Aggarwal say, “Star Health outlined strong growth opportunities in the health insurance space in India. After the lifting of COVID-related restrictions, there is growing acceptance of the need for hospitalization, leading to larger customer walk-ins wanting to avail health insurance policies without being prospected.” 

According to the analysts, the insurance company is planning to expand its presence in rural India by creating a dedicated vertical for addressing demand from these geographies. Jain and Aggarwal expect Star Health to deliver an 18% gross premium CAGR over FY22-25, led by strong growth in retail health insurance and expect claim ratios to improve due to the pandemic receding. They also remain optimistic about the company due to its healthy earnings growth and limited cyclicality risk.

  1. Bandhan Bank: ICICI Securities maintains its ‘Buy’ rating on this bank but reduces its target price to Rs 408 from Rs 414. This implies an upside of 54.9%. Analysts Kunal Shah, Renish Bhuva, and Chintan Shah have cut their target price mainly due to the disruptions in collection efficiency and disbursements in Q1FY23. These disruptions were caused by the Assam floods and the revision in RBI regulations. However, they expect a recovery in the bank’s collection efficiency and disbursements in the coming months. They are constructive on mortgage lending growth as well.

The analysts say the bank is looking to open more than 500 branches in FY23, predominantly outside of its key markets Assam and West Bengal. Given these expansion plans, they expect the bank’s operating expenses to rise but the operating expenses to assets guidance of 2.6-2.7% to be maintained. They also see the firm’s increasing investment in technology as a key positive. They estimate the company’s net profit in FY24 to grow by 24.4% over FY23.

  1. Au Small Finance Bank: Axis Direct retains its ‘Buy’ rating on this small finance bank with a target price of Rs 705, implying an upside of 17.7%. The analysts at the brokerage expect the bank’s strong disbursement growth momentum to continue over the medium term. They see this growth led by vehicle finance, home loans, credit cards, and business banking segments. The bank’s asset quality recovery since the disruptions caused by the pandemic is a key positive. They expect its asset quality to further improve as “the restructured book has been exhibiting strong collection trends and slippages from the pool well below the anticipated levels”.

The analysts also expect the company’s net interest margin to remain stable despite an increasing interest rate environment. However, operating expenses can increase in the medium term as the firm is investing in expansion and technology. Nonetheless, Axis is positive about the small finance bank’s growth prospects given its stable NIMs and low credit costs, and the analysts expect the company’s net profit to grow at a CAGR of 26.3% over FY22-25.

  1. Union Bank of India: Motilal Oswal maintains a ‘Buy’ call on this public sector bank with a target price of Rs 50, indicating an upside of 14.8%. After attending the Union Bank’s thematic investor day on asset quality, Nitin Aggarwal, Yash Agarwal, and Vinayak Agarwal say, “The bank has segregated and shifted the loan portfolio to dedicated verticals, which focuses on marketing and general servicing.” The bank has opened 250 retail loan points, 125 MSME loan points, mid-corporate branches, and 13 large corporate branches to primarily focus on specific loan segments. 

The analysts note, “The bank saw recoveries of Rs 3,800 crore and is on track to achieve total recoveries of Rs 15,000 crore in FY23.” For FY23, they expect GNPA and NNPA to be at 9% and 3% respectively, and expect the slippages to moderate to less than 2%, with a credit cost of less than 1.7%. 

Note: These recommendations are from various analysts and are not recommendations by Trendlyne.

(You can find all analyst picks here)

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