Mid-tier banks could offer higher returns compared to large banks in the near term barring a severe third wave of Covid-19, said Investec in a note. Raising its price targets on stocks such as City Union, Federal, CSB, Karur Vysya and DCB, the brokerage said in the absence of a third wave, they are optimistic on the recovery momentum of these mid-tier banks led by credit cost normalization, improved credit growth and higher net interest margins (NIM).
"While we continue to like large-cap banks (ICICI, Kotak Mahindra Bank), which can offer 15-16% compounding, we believe mid-tier banks which have been trading at a discount to book value could offer higher returns in the near term, barring a severe third wave," said Investec.
Investec said the September quarter threw up a surprise with banks showing a strong rebound in advances growth, even for lenders that have struggled in the past such as Yes Bank, DCB Bank and City Union Bank. Besides all these factors, optimism for these banks is accentuated by positive management commentary.
"On the growth front, for the first time since the outbreak of Covid, the managements of most mid-tier banks expressed optimism and were quite confident of improving growth. Asset quality stress seems to have bottomed out for these banks, it said. "Net slippages for most mid-tier banks were low while incremental restructuring moderated and came in lower than guidance."
The brokerage also said that drivers of growth during the quarter were "SME and retail, which should sustain in the near to medium term. Banks with lower exposure to the corporate segment should report higher growth incrementally."