CLSA has identified key themes for the Indian financial sector in 2018 including a trend reversal on rates and rise in bank credit growth this year. The brokerage also expects continuity in financialisation of savings, $15 billion-$20 billion of pipeline of capital raisings and a pick-up in the housing sector. Keeping these factors in mind, the brokerage has put the investment themes into four brackets. One theme is of corporate banks with strong CASA franchise and balance sheet and second is of small banks that can become larger with improving deposit franchise. Thirdly, CLSA is bullish on housing finance companies which can leverage the housing opportunity. The brokerage likes non-lending financials for their ability to leverage financialisation of savings.
CMP: Rs 309.25
Target Price: Rs 380*
Among corporate banks with strong CASA franchise and balance sheet, CLSA prefers ICICI Bank. CLSA expects ICICI Bank’s asset quality pressures to abate over the next year as it recognises the majority of stressed loans as nonperforming loans and select corporates deleverage their balance sheets. “With a strong CASA franchise and wellcapitalised balance sheet, it is poised for growth and ready to absorb credit costs and IndAS transition,” said CLSA.
CMP: Rs 1,643.65
Target Price: Rs 2,060*
IndusInd Bank is CLSA’s top pick to play the theme of small banks becoming large. CLSA said IndusInd Bank is an emerging lender with a market share of over 1% which is leveraging its improving deposit franchise to increase its loan book and de-risk balance sheet. “A better CASA ratio and expansion into new retail segments will drive growth,” said CLSA, forecasting a 25% earnings CAGR over FY17-FY20 period with 18-19% return on equity.
CMP: Rs 1,702.05
Target Price: Rs 1,900*
CLSA believes Housing Development Finance Corporation is the best play on the opportunity in the housing finance segment. “We expect HDFC to see 17% CAGR in loans over FY17-20 which should drive 16% CAGR in earnings; gains from sale of stake in subsidiaries can be utilised to beef up contingent provisions,” said CLSA. The brokerage added that though the rise in bond yields recently will increase HDFC’s funding costs, the same can be offset by some rise in the share of high-yielding corporate loans.
ICICI PRU LIFE INSURANCE COMPANY
CMP: Rs 374.80
Target Price: Rs 560*
ICICI Prudential Life is also among CLSA’s top picks as non-lending financials are emerging as key beneficiaries of financialisation of savings and are also gaining market share from banks. The brokerage said ICICI Prudential Life should benefit from healthy growth in premiums and expansion in margins that should drive return on embedded value of 17-19%. The brokerage said valuations of ICICI Prudential Life’s stock are reasonable at 2.7 times FY19 P/EV.
*CLSA target price