The tail risks for India’s banks have reduced after the recent fundraising and relief measures coming from the RBI, pushing global investment banking company UBS to turn bullish on select public and private lenders.
The tail risks for India’s banks have reduced after the recent fundraising and relief measures coming from the Reserve Bank of India (RBI), pushing global investment banking company UBS to turn bullish on select public and private lenders. With economic recovery picking up pace and no major job losses in the formal sector, the risk on non-performing loans is now lower, UBS said in a report. Leading private banks such as ICICI Bank, Axis Bank, Kotak Mahindra Bank, and even Yes Bank have managed to raise funds through various avenues, helping them gear up to tackle any upcoming headwinds.
“We cut our FY21/FY22 estimates for GNPL formation from 7%/5% to 4%/5% of loans,” UBS said in the report. It added that the banking sector’s downside risks are limited as it raises price targets for the banks under its coverage by 0-88%. Along with reduced risks aligned with banks, UBS added that bank stocks are trading below the five-year average, making them an attractive pick. The investment bank said that most of the lenders in India are better capitalised now than in previous crises. Looking at moratorium, a key overhang for the sector, almost all banks have seen a sizable reduction coming into moratorium 2.0. UBS has picked ICICI Bank and Axis Bank as their top bets while it has upgraded State Bank of India and IndusInd Bank to a ‘Buy’ call.
ICICI Bank: The private sector lender is one of the leading picks by domestic as well as global brokerages, and UBS says it picks the banks based on its strong retail franchise with moderate asset quality risks. “We think its recent stressed cases appear low. Since its recent share price correction, we consider valuations reasonable,: the report said. ICICI Bank has 18% of its loans under moratorium, down from 30% during the first phase of the moratorium. UBS said it expects ICICI Bank to trade at a premium to its five-year average multiple. Currently the stock is trading at Rs 396 per share. Target price has been increased to Rs 520 apiece.
State Bank of India: India’s largest public sector bank has recently found CLSA and Goldman Sachs going bullish on it. UBS says that SBI’s provision coverage ratio makes it better placed than other peers. “ Loans under moratorium – 9.5% of total term loans as of June 2020 – will likely drive the magnitude of SBI’s restructuring,” the report said. SBI is currently trading at inexpensive valuations and at a price of Rs 215 per share. UBS has a target price of Rs 260 on the stock.
Axis Bank: The report said it favours the stock due to its potentially favourable loan mix changes, gains from its physical and digital networks, and lower credit cost. Axis Bank, earlier this month raised Rs 15,000 crore through a qualified institutional placement, helping it shore up capital. Axis Bank is expected to give an estimated ROE of 8%/12% in the current fiscal year and the next one, due to high asset quality risks and a slowing loan book. UBS expects ROE to bounce back to about 15% in financial year 2023. A target price of Rs 650 per share has been pinned on Axis Bank by UBS. The stock currently trades at Rs 472 apiece.
IndusInd Bank: The stock has been upgraded to a ‘Buy’ call with a target price of Rs 675 per share, from its current trading price of Rs 600. UBS believes that the recent regulatory relief could help ease the non-performing asset burden for IndusInd Bank and mitigate the tail risks of accelerated defaults in the near term. IndusIn Bank shares are trading at 1.0x FY21E P/BV, which according to the report looks inexpensive.