HDFC Securities said that its analysis, based on impairment assumptions for the first half of the current financial year, suggests that banks that raised equity capital during the previous year have built more than 50bps higher provisioning cushion than their peers.
The fourth-quarter earnings season is now drawing to a close and most large lenders, that have reported their results so far, have navigated through an extremely difficult pandemic year with strong provisions. Domestic brokerage and research firm HDFC Securities, in a report, said that banks in its coverage reported full-year slippages at 2.1% during the fiscal year 2021. This is down from 2.5% in the financial year 2020. But now, lenders are gearing up to dodge the second wave of the pandemic, which has been more severe, in term of loss of human life.
Who could be vulnerable?
HDFC Securities said that its analysis, based on impairment assumptions for the first half of the current financial year, suggests that banks that raised equity capital during the previous year have built more than 50bps higher provisioning cushion than their peers. “Assuming a CET1 threshold of 12%, we identify mid-sized banks such as City Union Bank and Federal Bank within our coverage universe that may need to shore up their capital buffers,” HDFC Securities said. They further added that mid-sized banks are more vulnerable with high geographical concentration risk in their loan portfolios compared to larger banks.
What to buy?
Axis Bank: The brokerage firm has a buy rating on Axis Bank with a target price of Rs 758 per share. Since the middle of April, the stock has surged nearly 15% to now trade at Rs 727 apiece. P/E(x) ratio is expected to come down from 33.1 to 17.1 this fiscal year.
Bandhan Bank: The lender has remained an underperformer so far this year. The stock is down 26% since January 1, to now trade at Rs 293 per share. However, HDFC Securities has a buy rating on the scrip with a target price of Rs 413 apiece.
City Union Bank: Among HDFC Bank’s favoured scrips in the banking space, the stock is expected to surge to a price of Rs 198 per share from the current Rs 173. The stock is down 4%, year to date but has gained 15% since the middle of April.
Federal Bank: The private sector lender has zoomed 28% since the beginning of this year and HDFC Securities believe there is further upside potential. The bank trades at Rs 86 per share and the target price for the same is Rs 97 apiece.
ICICI Bank: The bank is among the most favoured bank stocks for HDFC Securities. ICICI Bank remains our top pick with a target price of Rs 649 apiece, the standalone bank valued at 2.1x March 2023 ABVPS. Our thesis is anchored on a strong balance sheet, comfortable capitalisation, and consequent ability to disproportionately gain market share.
State Bank of India: The state-owned lender has skyrocketed 48% so far this year and now trades at Rs 412 per share. HDFC Securities said that SBI offers an attractive risk-reward, especially due to its surprisingly strong asset quality performance. The brokerage firm has a target price of Rs 490 on the scrip.