MB Mahesh, Analyst at Kotak Institutional Equities, feels that large banks offer decent upsides at the portfolio level.

“We maintain our positive view on State Bank of India (SBI), ICICI Bank, and Axis Bank. We still see meaningful upsides in these stocks. In mid-caps we like Federal Bank, and in small-caps we like DCB Bank,” he said in an interview with CNBC-TV18.

According to him, the broad situation on the ground suggests that the larger banks are in a much better position at this point in time.

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“They have come out of COVID-19 reasonably well. The last couple of quarters indicate that the divergence between the large banks and the small banks is quite high. To that extent you can see their aggression on the ground and you will see that the large banks are taking away a little bit of a lead in terms of credit growth creation or gaining the larger share of the incremental credit which is getting created out there,” he said.

The mid-tier banks are struggling a bit because their portfolio is largely concentrated around the self-employed or segments in the SME space which are getting affected at this point in time, he noted.

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When asked if net interest margins (NIMs) are going to peak or fall, he replied, “If interest rates were to move aggressively upwards and if they are not backed by incremental deposit creation but credit growth is extremely strong, then there is a fair chance that margins will come under pressure. However, it is going to be a very moderate growth. If cost of funds does not move or lags behind credit growth creation, then you can still be a little bit more optimistic on the margin outlook.”

Overall, he believes, margins do not have scope for improvement at this point in time. Most of the underlying lending products are probably at peak margins today and there could be potential surprises on the negative side, he added.

According to him, the loan book today is materially different from a pricing perspective as compared to where it was about three-five years back or even a decade back.

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“We have moved from prime lending rate to base rate to MCLR and today it is the external benchmark. So, the asset book repricing tends to be much faster in this cycle compared to what it was in a previous cycle,” he explained.

For the full interview, watch the accompanying video.

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(Edited by : Thomas Abraham)