2 Stocks From The Banking Sector That Could Generate Good Returns

The advent of the second COVID wave has muddied sentiment and impaired the FY22E earnings visibility. "With multiple states entering into extended lockdowns and restrictions, we see downside risks to our FY22 earnings estimates," Motilal Oswal has said in a report. Here are two stocks from the banking sector that could generate good returns as per a Motilal Oswal Research Report.

ICICI Bank

According to the Motilal Oswal report the bank reported a strong quarter, led by healthy business performance across all business segments. Strong operating performance was aided by healthy NII growth (17bp NIM expansion), though weak other income affected net earnings.

"Asset quality remains under control with controlled slippages and total restructuring at 0.5% of loans. Provision coverage remains best in the industry. The bank holds a COVID related provision buffer of INR74.75b (1% of loans), providing comfort on anticipated normalization in credit cost. Liability franchise continues to improve with healthy CASA growth. Concerns. Rising COVID-19 cases and regional lockdown would be a key to watch out for in the near term. Any increase in BB and below pool could keep slippages elevated," Motilal Oswal report has said.

According to it, the bank has delivered double-digit RoE (~12.6%) for the first time post FY17 and the firm expects RoA/RoE to improve to 1.7%/15.2% in FY23E.

Shares of ICICI Bank were last seen trading at Rs 600 on the NSE.

State Bank of India

According to Motilal Oswal, loan growth at SBI is showing healthy recovery in retail portfolio, with disbursements in many business segments surpassing pre-COVID levels, while deposit growth stood strong

"State Bank of India strengthened its Balance Sheet by creating higher provisions toward stressed accounts. The bank increased its PCR (including TWO) to ~90% in 3QFY21 (86% on a pro forma basis) from ~65% in 1QFY18. It holds a higher provision coverage of ~89% on corporate NPAs. Controlled pro forma slippages (INR20.7b) and low restructuring request (0.8% of loans) underscores an encouraging asset quality outlook," the firm has noted

The bank is well on track to keep credit cost under control, while recoveries from resolution of large accounts can further support earnings.

Concerns

A) Slower resolution of large accounts. B) Covid 2nd wave could impact collection efficiency once again.

"We believe the earnings normalization cycle for SBIN has begun as the uncertainty ushered by COVID-19 has receded significantly. We maintain our FY22E/FY23E estimates and project RoA/RoE of 0.8%/14.5% by FY 2023," the broking firm has stated.

Shares of State Bank of India were last seen trading at Rs 366 on the NSE.