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Jefferies Predicts 2025 as the 'Year of Easing' for Indian Banks
Last Updated: 9th January 2025 - 12:51 pm
Jefferies has forecasted 2025 as a crucial "Year of Easing" for Indian banks, with the Reserve Bank of India's (RBI) proactive measures addressing systemic risks and fostering a more balanced financial environment. The investment firm highlights key private and public sector banks poised to benefit from these improvements.
In its latest report, Jefferies emphasizes the RBI's efforts in narrowing the gap between loan and deposit growth, curbing the surge in unsecured loans, and moderating GDP growth. Early 2024 saw concerns from the RBI about the rapid growth of unsecured loans, banks' high exposure to non-banking financial companies (NBFCs), and an imbalance between loan (16%) and deposit (13%) growth. Additional issues included persistent inflation and inefficiencies in banks and NBFCs.
By the end of 2024, these challenges had seen significant progress. Unsecured loan disbursements dropped by 15%, lending to NBFCs slowed to 6%, and the loan-deposit growth disparity was reduced. GDP growth moderated to 5% in Q2FY25 from 8% in FY24, though inflation remains steady at 5%. Loan growth decelerated to 11% year-on-year, with credit growth for FY25–27 projected at 11-13%. These developments prompted slight downgrades in earnings-per-share (EPS) estimates, but the overall risk-reward profile for banks is improving. Regulatory conditions are stabilizing, and pressures on asset quality are easing.
Jefferies anticipates a potential 50 basis points rate cut in the first half of 2025, which, along with steady regulatory norms, could further bolster the sector. Asset quality concerns related to unsecured loans are expected to diminish by FY26, providing a positive earnings impact, although challenges in SME and microfinance (MFI) loans persist. Banks have also moderated operating expenses and maintained capital adequacy. However, PSU banks, Bandhan Bank, and IDFC First Bank exhibit relatively lower CET-1 ratios.
Among private banks, Jefferies identifies ICICI Bank, Axis Bank, and HDFC Bank as top picks, with Kotak Mahindra Bank upgraded from Hold to Buy due to improved valuations. In the public sector, SBI remains the preferred choice, while Bank of Baroda has been downgraded from Buy to Hold because of its high loan-to-deposit ratio and slower deposit growth, which could limit its performance and rerating potential.
Conclusion
2025 is set to be a pivotal year for Indian banks, driven by regulatory easing and improved asset quality. While private banks with robust deposit growth are expected to lead, specific public sector banks may face growth challenges due to structural issues.
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