Indian banks have outperformed their Asia-Pacific peers with some of the highest total returns in the quarter ended Sept. 30, as strong financial metrics and the nation's promising growth prospects support their stocks.
Indian banks, mostly small and medium-sized ones, occupied 12 slots on the list of 15 Asia-Pacific bank stocks with the highest total returns in the third quarter, according to data compiled by S&P Global Market Intelligence. South Korea-based Pureun Mutual Savings Bank Co. Ltd., Sri Lanka's Sampath Bank PLC and Jakarta-headquartered P.T. Bank Pan Indonesia Tbk took the remaining three slots in the ranking, with total returns of 103.70%, 37.42% and 27.62%, respectively.
Except for IndusInd Bank Ltd., all other Indian banks on the list reported market capitalizations of less than $10 billion. The Karur Vysya Bank Ltd. came second in terms of posting the highest total return — 87.53% — after Pureun Mutual Savings Bank.
"[Indian] banks are very well placed with a supportive monetary stance, healthy capitalization, improved liability profile, diversified asset mix and healthy asset quality, along with strong coverage ratios," said Jayesh Bhanushali, assistant vice president of research at IIFL Securities. "Tighter liquidity conditions, in an environment of rising loan demand, should in general benefit banks in terms of margins."
Bhanushali said core income is expected to improve further as fee-income-generating activities pick up. He added that increased investment in branches and attrition issues will likely be a drag on earnings but will be more than offset by benign credit costs. "Given this overall backdrop, we expect further re-rating for banks in general," Bhanushali said.
Index beaters
India's NIFTY Bank Index, which comprises the 12 most liquid and large Indian banking stocks, rose about 16% in the third quarter, beating the S&P BSE AllCap index, which posted growth of about 11% in the same period. The S&P BSE AllCap index is a comprehensive rules-based index that seeks to measure the performance of the Indian stock market.
India's economy is projected to grow faster compared with most peers following recovery from the slowdown brought about by the COVID-19 pandemic. The International Monetary Fund projects India's real GDP to grow 7.4% in 2022, according to a July report. Meanwhile, China's GDP is projected to grow at 3.3% in 2022, the report said.
Large Indian banks' loans could grow at an 18% compound annual growth rate over the fiscal 2022-2025 period, driven by continued strength in growth for the retail and services segments, along with a pickup in the growth for the industry segment, IIFL's Bhanushali said.
In addition to their improved asset quality, Indian banks are in "a sweet spot" to post healthy operating performance with higher loan growth, healthy margins and improving fee income traction, given their higher growth in the retail and SME segments, Bhanushali added.
Chinese banks falter
Conversely, mainland China-headquartered banks took a majority of the slots on the list of 15 Asia-Pacific bank stocks with the lowest total returns in the quarter, the data shows. Five Southeast Asian banks and one each from Pakistan and Hong Kong rounded out the list, which covered stocks posting total returns ranging between negative 44.47% and negative 17.22%.
China's slowing economic growth, strict COVID-19 lockdown measures and troubled real estate sector have contributed to investors' concerns about Chinese stocks in general. The People's Bank of China is taking a divergent route on monetary policy to many other central banks in the world as it looks to prop up the slowing economic growth, which has prompted analysts to lower their projections. UBS on Sept. 16 cut its 2022 GDP growth forecast for China to 2.7% and its 2023 growth forecast to 4.6% on lackluster third-quarter recovery and the ongoing property downturn.
PT Allo Bank Indonesia Tbk topped the list with total stock returns of negative 44.47%, followed by Vietnam's National Citizen Commercial Joint Stock Bank and China's Bank of Jinzhou Co. Ltd., respectively.
