SBI, ICICI, HDFC Bank shares at big discount; should you buy? Private banks may be due for re-rating

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August 14, 2020 4:30 PM

Banks could soon turn the tables and become attractive again for investors after addressing key overhangs that shadowed their performance in past few years.

Recently a large number of banks have successfully raised capital from the market as they look to gear-up to fight challenges emerging from the pandemic.

Banks could soon turn the tables and become attractive again for investors after addressing key overhangs that shadowed their performance in past few years. Global brokerage and research firm Jefferies, in a recent note said that tier-1 lenders in India may be re-rated as they address capital concern and succession plans — two of the key overhangs for the sector. Banks in India have been sailing in choppy waters for a while now. Capital concerns and rising non-performing assets have had investors turn risk averse. Recently a large number of banks have successfully raised capital from the market as they look to gear-up to fight challenges emerging from the pandemic.

Fundraising efforts boost capital

According to Jefferies, banks have managed to raise $9 billion (Rs 67,000 crore) in little over a month to beef up capital. “In a positive surprise, within a short period, lenders have actually raised US$9bn which is equivalent to 80% of proposed raising by lenders, other than PSU banks,” the note said. Almost $8 billion has been raised and another $0.6 billion is in-progress through rights issues. Overall banks have planned to raise $13 billion or Rs 97,000 crore. ICICI Bank and Axis Bank have completed their qualified institutional placements worth Rs 15,000 crore and Rs 10,000 crore respectively. Yes Bank managed to raise almost Rs 15,000 crore through a follow on public offer. Kotak Mahindra Bank, IDFC First Bank, and IIB too have raised funds through various means.

“With capital raisings & promoter stake-sales largely done, overhang from large equity-supply has been largely crossed,” the global investment manager said. PSU banks too have planned to raise over $5 billion or Rs 500 crore but that will be largely funded by the government, according to the note.

Succession overhang solved

Over the years, private lenders have also managed to blow away the uncertainty surrounding their succession plans. Starting with ICICI Bank and now the latest being Sashidhar Jagdishan’s appointment at HDFC Bank. While ICICI Bank and Axis Bank completed the succession in late 2018 or early 2019, IndusInd Bank and HDFC Bank have also announced succession plans. “RBI’s proposed norms for tenure of CEOs at banks are likely to affect Kotak Bank ahead of others and clarity is awaited; outside of this most banks are well settled in terms of CEO-level succession,” Jefferies added.

Although concern over asset quality remains in focus, banks have also continued to make higher provisions. In moratorium 2, 9% of the total loans of HDFC Bank are under the pause, Kotak Mahindra Bank has 10% loans, ICICI Bank has 18%, Axis Bank has 10%, and IndusInd Bank has 6%. Although the moratorium loans are high, analysts at Jefferies believe that credit costs in the next fiscal year should absorb the risks.

Valuations down

“Valuations for most lenders are at 14-65% discount to five-year average, especially corporate banks, and we see scope for re-rating,” Jefferies said. Sector valuations are below 5-year average, while ICICI Bank is trading at a 25% discount to its 5-year price adjusted book value. HDFC Bank, Axis Bank, and Kotak Mahindra Bank also trade at a discounted valuation. SBI is at a multi year low when it comes to valuations. “ICICI, HDFC Ltd and IndusInd Bank offer better risk-reward; we rate HDFC Bank, Kotak Mahindra Bank, and Axis bank as BUYs as well,” Jefferies said.

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