Suresh Ganapathy of Macquarie Capital Securities feels that valuations of most banks are not expensive, despite the recent rally in these stocks.

“If you were to look at the valuations of these banks relative to historic average, they are still at best around historic averages,” Ganapathy said in an interview to CNBC-TV18.

“In some cases like State Bank of India (SBI), they are still below historic averages. Therefore there is still enough upside left in the financial space because I think the next five years is going to be one of the best years for the entire financial sector,” he said.

According to him, there is still a lot of room for rerating for financial sector looking at their valuations relative to other sectors.

“All the bank stocks despite the recent rally still offer significant upside even with respect to their historic average valuations,” he stated.

He believes there is significant catalyst for the rerating would be a pick-up in loan growth. “We do believe that next year at least we should see loan growth going from 5 percent to 6 percent, currently it is closer towards 10 percent and that should give a greater degree of confidence for the markets,” Ganapathy said.

Return on assets (RoA) would be a key parameter to watch out for.

“RoA will take some time to pick up because all the banks are excessively capitalized but if SBI touches closer to its 1 percent RoA, which it has achieved in last 25 years and ICICI Bank touches 1.7-1.8 percent, markets will be very happy because then you know that you are moving towards your sustainable levels of profitability whereby you can expect further rerating in these names,” he said.

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(Edited by : Santosh Nair)

First Published:Mar 3, 2021 1:06 PM IST