Jefferies predicts that 2025 will be the year of easing for Indian banks
Jefferies prediction – In its most recent report, Jefferies predicts that 2025 will be a crucial year for Indian banks, thanks to the Reserve Bank of India’s (RBI) focused efforts to reduce systemic risks. These measures have helped close the gap between loan and deposit growth, limit the expansion of unsecured loans, and stabilize GDP growth.
At the beginning of 2024, the RBI expressed concerns about the rapid increase in unsecured loans, banks’ exposure to non-banking financial companies (NBFCs), a significant difference between loan (16 percent) and deposit (13 percent) growth rates, ongoing inflation, and operational inefficiencies in banks and NBFCs. By the end of 2024, many of these issues had been addressed.
Unsecured loan disbursements decreased by 15 percent, lending to NBFCs slowed to 6 percent, and loan-deposit growth became more balanced. GDP growth also moderated to 5 percent in Q2FY25 from 8 percent in FY24, while CPI inflation remained at 5 percent. Loan growth slowed to 11 percent year-on-year, with credit growth expected to be between 11-13 percent for FY25-27, leading to slight downgrades in earnings-per-share (EPS) estimates.
The report highlights that the risk-reward balance for banks now looks favorable, with asset quality pressures easing and regulatory conditions stabilizing. A potential 50 basis points rate cut in the first half of 2025, along with consistent regulatory standards, could further bolster the sector. Concerns about asset quality related to unsecured loans are expected to diminish by FY26, providing a boost to earnings, although worries persist regarding SME and microfinance (MFI) loans.
Banks have also reduced operating expenses and maintained capital adequacy, although PSU banks, Bandhan Bank, and IDFC First Bank exhibit relatively lower CET-1 ratios.
Jefferies anticipates that private banks experiencing robust deposit growth will excel, while HDFC Bank and PSU banks may encounter slower growth. Among private banks, ICICI Bank, Axis Bank, and HDFC Bank are recognized as top choices, with Kotak Mahindra Bank being upgraded from Hold to Buy due to enhanced valuations.
On the public sector front, SBI continues to be the preferred option. Conversely, Bank of Baroda has been downgraded from Buy to Hold due to its elevated loan-to-deposit ratio and sluggish deposit growth, which could impede its performance and potential for reevaluation, according to the report.
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Disclaimer: This blog post is for informational purposes only and should not be considered financial advice. Investors should conduct thorough research and consult with a qualified financial advisor before making any investment decisions.