Indian banks better placed than their US peers due to attractive valuations and stickier deposits
- Indian banks’ attractive valuations make for a great avenue for value investing, say analysts.
- Despite the banking sector crisis in the US and Europe, Indian banks are relatively well-cushioned due to stickier deposits.
- According to RBI data, household deposits accounted for 63% of total deposits of Indian banks at the end of March 2022, while corporate deposits’ share stood at just 22%.
- Corporate deposits tend to be less sticky and more risk-sensitive as compared to household deposits.
Turmoil in the US and Europe’s banking sector has had an impact on banks in other markets as well, including India. The Nifty Bank index has fallen by over 5% since March 8 when Silvergate Bank collapsed. Since then, three other banks collapsed, while equity markets in the US and Europe fell between 1-5%.
Now, there is a growing consensus amongst analysts and brokerages that Indian banks are in a stronger position than their US counterparts. Despite this, Indian equity markets declined by over 4% since Silvergate Bank’s collapse. According to analysts, this is collateral damage due to the negative investor sentiment.
“The market’s concern around their (US and European banks) financial stability has damaged sentiment for the Indian market and Indian banks too,” said a report by Kotak Institutional Equities.
Earlier in March, global brokerage Jefferies underlined that Indian banks have passed its SVB test thanks to sticky deposits and less reliance on investments in bonds.
Stickier deposits provide cushion
Retail deposits, which tend to be stickier when compared to wholesale or corporate deposits, provide Indian banks with the needed cushion at a time when troubled banks in the US and Europe are experiencing large redemptions in the wholesale deposits segment.
Kotak’s analysts underline that Indian banks have a high proportion of retail deposits (savings account plus retail part of term deposits) in overall deposits while US banks have a high share of wholesale deposits as part of their overall mix.
For instance, the bank run on Silicon Valley Bank was worsened by the fact that it catered to nearly half of all the venture capitalist-backed startups in the US, who tend to have larger deposits when compared to retail depositors.
As much as 97% of SVB’s total deposits were above the $2,50,000 limit insured by the Federal Deposit Insurance Corporation (FDIC) – according to the bank’s filings.
This is in stark contrast with Indian banks, where household deposits accounted for 63% of the total deposits. The share of corporate deposits stood at just 22% at the end of March 2022, according to Reserve Bank of India data. Corporate deposits tend to be less sticky and more risk-sensitive as compared to household deposits.
Additionally, Indian banks posted a stellar December quarter, delivering decade-best return on assets, according to an analysis by Bernstein.
Valuations attractive
Looking beyond the collateral damage to Indian banking stocks, there is also a consensus that these stocks are available at attractive valuations.
“Valuations of most banks and non-banking financial companies (NBFC) are well below their pre-Covid levels, whereas their fundamentals are much stronger,” said the Kotak report, adding to the growing chorus of analysts and brokerages bullish on the Indian banking sector.
Earlier, a report by Bernstein noted that the price-to-book multiples – also known as PB ratio – of Indian banks are still below their decadal peaks. It estimates the PB ratio of the top five Indian banks, namely, HDFC Bank, State Bank of India, ICICI Bank, Axis Bank and Kotak Mahindra Bank, to be between 1.4 to 4.2 in FY23. In contrast, the PB ratio of Asian banks is pegged at 13.41.
Last seen in 2013, these “subdued valuations, despite strong operating metrics make the risk-reward picture for the Indian banks rather compelling,” Bernstein added.
Analysts at Kotak also underline another factor behind their bullish outlook on Indian banks. The rich valuations of consumption, investment and outsourcing stocks’ and growing consumption concerns in the discretionary segment mean that banks are one of the few avenues for value investing.
When considered along with the fact that their valuations are attractive and deposits are sticky, Indian banks make for a good investment destination, the brokerage said.
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