Citi named ICICI Bank and IndusInd Bank as its “top picks” in the Indian stock market after expressing a preference for the country’s banking sector over the technology industry. In a report titled “Hotly Debated: Banks vs. IT Services” on Sept. 28, Citi analysts said banks are poised to outperform the information technology services sector over the next 12 months. Citi believes banks will benefit from strong cyclical and structural growth tailwinds since the sector is more exposed to the domestic economy. In contrast, IT services firms could face headwinds from an uncertain global economic outlook as the industry is highly exposed to foreign trade. The Wall Street bank also expects developed market gross domestic product to contract in the first half of 2024, which is unlikely to help India’s technology sector. Citi expects ICICI Bank ‘s shares to rise by 26% to 1,195 Indian rupees ($14.4) over the next 12 months. The lender’s stocks are also traded on the New York Stock Exchange. ICICIBANK-IN 5Y line “Our view remains intact: overweight banks, underweight IT over the next 12 months,” said Citi analysts led by Surendra Goyal. “We thus believe Indian banks will not be directly impacted by an uncertain global growth or global higher-for-longer policy rate cycles.” With Indian households and companies still relatively underleveraged, Citi sees room for increased lending growth. The bank’s analysts expect private sector banks to continue gaining market share from public sector banks. India’s banking sector is dominated by several state-owned banks, leaving the industry ripe for disruption from private sector lenders. However, Citi noted increasing competitive pressures from smaller firms vying for deals in the IT services sector. It said that profit margins could also come under pressure over time because of annual wage hikes. The Citi analysts also said that banks are trading close to historical averages on a price-to-book basis. Meanwhile, IT services firms trade at a significant premium in absolute terms and relative to global peers. “Overall, bank valuations (absolute and relative) look more reasonable vs. IT Services,” the Citi analysts concluded. The investment bank cautioned that global factors like a slowdown in India or sharp currency moves could undermine their bullish view of banks. But barring those risks, Citi believes investors looking for ideas in India should be overweight banks and underweight IT services. — CNBC’s Joanna Tan contributed to this report.
