Risk-reward in banking sector now favourable; top 10 stocks bets from Nomura

NEW DELHI: After the recent correction, valuations of most private and public sector banks look reasonable again, brokerage firm Nomura said in a report. The recovery is likely to remain gradual, but near-term stress looks priced in, and a meaningful revival in earnings is likely in 2HFY16F, it said.

The brokerage firm expects reforms and various government initiatives to reflect in bank earnings from 2HFY16F. Liquidity and the rate environment will likely stay favourable as loan growth should pick up gradually, said the Nomura report. They expect PSU bank earnings to improve by end-FY16F.

While there could be some debate on the pace of reforms, directionally, the government has moved in the right direction by resolving infra issues. For example, fast coal auctions, efforts to resolve gas power issue, and increasing coal production.

Retail banks have already started to see a pick-up in retail credit offtake. For corporate banks, Nomura believes earnings will pick up in 2HFY16F with better corporate or fee growth and lower credit costs.

Nomura expects a 21 per cent PAT CAGR for private banks and 27 per cent for PSUs in FY15-17F (after remaining flat for five-six years).

However, near-term growth is likely to remain weak and that will drag PPOP growth lower for corporate banks. Nomura expects some pick up in 2HFY16F with the anticipated increase in project announcements.



(The above report is compiled with inputs from a Nomura report)