top picks: HDFC Bank, SBI, Axis Bank Bernstein’s top picks

Mumbai: US investment research firm Bernstein has initiated coverage on the Indian lenders with HDFC Bank as its top sector pick. The stock has an upside potential of about 38% from the current levels, it said.

The firm has an overweight rating on India’s largest lender

(with an upside potential of 15.3% at a target price of ₹700), as well as Axis Bank (14.3% upside potential at ₹1,000 target).

“The

of banking sector value creation – healthy credit demand, rising margins, and benign credit costs – have all fallen neatly in place for the Indian banking sector, setting the stage for a period of healthy growth and profitability,” said Berstein’s senior analyst Pranav Gundlapalle in a client note.

Indian banks’ ability to deliver stable interest margins through the peaks and troughs of rate cycles and strong household borrowings that drive the sector’s credit growth gives credibility to its resilient forecasts even in an uncertain global macro environment, said the firm.

Bernstein has evaluated banks on three factors – strong deposit base, scalability and quality of investments in their digital channels.

“We strongly favour HDFB…(it) is the PVB (private bank) with the best deposit franchise and has the potential for significant operating leverage ahead,” the note read. “The stock is valued at a significant discount (~30% to long-term average) ahead of the merger with its parent,

Ltd. – based on our assessment of the impact from the merger, the discount is unwarranted and set to reverse quickly.”

Since January, has gained over 5%, has advanced 21%, has jumped 26% and SBI has risen over 28%. Bank Nifty index has moved up 17% in this period.

“What makes India unique is the extent of pain that the (banking) sector has undergone in the last decade (both in terms of anaemic loan growth and the extent of balance sheet cleanup) which in turn should ensure the sustainability of these positive trends over a long period of time,” said Bernstein.

“On loan growth, India’s private sector credit to GDP has actually dropped 20 pp vs. a healthy increase for most others. So it’s not just a GDP multiplier but there is a catchup pending too – which should provide comfort on the loan growth runway,” it said.