Bear goes into hibernation
Our internal analysis also suggests that Ebitda (earnings before interest, taxes, depreciation and amortisation) margins of corporates have bottomed out and that falling commodity prices coupled with a benign rate cycle should result in a reduction in SME sector NPL formation.
Also, in the overall pall of gloom, the market has failed to recognise structural changes like lower reliance on bulk deposits, less funding of short-term unsecured corporate advances and movement towards system-based recognition of NPLs. Indian banks over the past three years have also reduced their concentration risks—a fact that has been largely unnoticed.
We upgrade State Bank of India (SBI) to ‘Outperform’ from ‘Neutral’ and Punjab National Bank (PNB) to ‘Neutral’ from ‘Underperform’, as these are the two banks that are most leveraged to the SME/mid-corporate NPL cycle. We rate 'Outperform' on Axis Bank now that it has come off the restricted list.
So what has changed and why the upgrade?
Two main aspects led to the upgrade. Our view on the asset quality cycle—which we believe is close to the bottom. Further, loan growth and margins have also
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