New Delhi [India], November 7 : Indian banks are expected to have a steady growth in earnings and returns over the next 3-4 years, according to a report by Jefferies.
The report expects a 13 per cent compound annual growth rate (CAGR) in loan growth for banks between FY24 and FY27, underpinned by a supportive environment and expected adjustments in interest rates.
"Expect steady growth in earnings and stable returns, Over FY24-27, banks we cover should see 13 per cent Cagr in loans We factor 25-50bps cut in rates & depending on timing NIMs will move" the report said.
The report anticipated that interest rates may be reduced by 25 to 50 basis points (bps) during this period. Depending on the timing, these rate cuts could impact banks' Net Interest Margins (NIMs), which measure the difference between interest income generated and interest paid to depositors.
The report projects that banks' Net Interest Income (NII), a critical metric indicating earnings from lending, could grow at a steady 12 per cent CAGR, which would support overall earnings growth.
However, Jefferies noted some areas of caution that could influence growth in other revenue streams, particularly fees. Growth in fees may be at risk due to expected declines in the disbursal of unsecured loans, which generally carry higher interest rates and generate higher fees for banks.
Additionally, there may be an impact on fees from the amortization of life insurance policy sales, as earnings from these fees are spread over time.
Despite these risks, the report expects banks' return on assets (ROA) and return on equity (ROE) to remain healthy, underscoring the sector's stable profitability potential.
The report also highlights that while the Nifty Banks index has risen by 19 per cent over the past year, it has underperformed the broader NIFTY index, which saw a 27 per cent gain. Banks have trailed other financial segments such as insurance, fintech, and capital markets, partly due to increased competition in the financial services space.
As per the report, valuations in the banking sector are still below the long-term average, presenting an attractive investment opportunity.
Currently, the Nifty Banks index is trading at a discount of around 35 per cent to the Nifty index, compared to a long-term average discount of 12 per cent. It also added "gap between earnings growth of banks and market has also narrowed to just 2ppt now all adding-up to favourable risk reward".
The report points to a promising outlook for Indian banks, supported by steady loan growth, stable returns, and attractive sector valuations, while also cautioning on potential challenges in fee-based income.