Banks building on long-term valuations trust, says ICICI Securities

Updated : December 29, 2020 03:49 PM IST

Stress recognition is due in the coming quarters, but credit cycle disruption seems within manageable levels.

Easy monetary policy, excess liquidity is also lowering the cost of credit.

Banks spent a tumultuous 2020 as extreme pessimism in March with the onset of COVID-19 dealt a severe blow to their performance, both fundamentally as well as on the bourses. However, the gradual unlocking during Q3CY21 has provided much-needed relief and helped restore investor confidence.

The end result, the barometer of the sector - the Bank Nifty bounced back smartly. It is expected to gather further momentum as skepticism has given way to the government efforts aimed to rebuild the trust.

There are several questions emerging as suggested by the ICICI Securities which it attempts to address and are crucial for the sector as well as for investors too. They are: 1) is the imminent normalisation phase much ahead of expectations? 2) are we at the turning point to expansionary phase of the financial cycle? 3) is there enough visibility of the pandemic not having a long-drawn effect on fundamental earnings outlook? 4) what are the long-term structural valuation factors that are more than offsetting the adverse impact of intermediate disruption?

ICICI Securities’ analysis suggests a cumulative slippage run-rate of 4-7 percent over FY21/22E (1030 percent higher than last three years average) for the banking sector. Factoring-in adequate provisioning and 80 percent utilisation of (existing) contingency buffer, translates into credit cost of 3-6 percent over FY21E/FY22E (lower than envisaged earlier).

"Post evaluation of operating leverage and cost structure, we expect banks to structurally shave off costs by 20-30 bps of assets. On this basis, we increase earnings by 2-5 percent for FY21 and 5-30 percent for FY22E," ICICI Securities said in a report.

The brokerage house noted that the financiers have created a war chest of liquidity, deposits, capital and credit contingency buffers – much in advance to bear the brunt of economic and credit cycle disruption.

Even prior to COVID-19, the financial sector was already in contraction phase as indicated by corporate deleveraging, modest credit growth, corporate credit stress, liquidity crisis, etc. COVID disruption accentuated the phase, it said.

However, the economy is recovering faster and rebound in lead indicators suggests the crisis is not as severe and prolonged as anticipated. Stress recognition is due in the coming quarters, but credit cycle disruption seems within manageable levels (likely to be elevated for next 3-6 quarters but should peak out thereafter).

“We are at the cusp of releveraging that will drive credit growth in double digits FY22E onward. Easy monetary policy, excess liquidity is also lowering the cost of credit. All this, coupled with ample resources with financiers’, sets the stage for CY21 to be a turning point to expansionary phase,” it said.

ICICI Securities has downgraded Kotak Mahindra Bank to 'Hold' from 'Buy' with a revised target price of Rs 2,013 from Rs 1,708 earlier. It also downgraded AU Small Finance Bank to 'Add' from 'Buy' and revised the target price to Rs 940 from Rs 935 per share.

With HDFC Bank providing 20 percent upside, the brokerage inclined its preferences more towards Axis Bank (TP – Rs 814), SBI (TP – Rs 361), Bandhan Bank (TP – Rs 537), and Federal Bank (TP – Rs 88) as outperformers (with more than 35 percet return expectations over next 12-18 months).

"We are not yet at a juncture of complete risk-on stage and prefer going slow in building position in other names. We maintain ‘Add’ on IndusInd Bank and RBL Bank," the brokerage house said.

Published : December 29, 2020 03:49 PM IST

Banks building on long-term valuations trust, says ICICI Securities

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