The Nifty Bank index has declined over 38 percent in 2020 as compared to a 23 percent fall in the Nifty50 index.
In the wake of historic output loss followed by potentially a prolonged economic recovery during FY21-22, BofA Securities further downgraded their view of the banking sector. It has downgraded ratings for SBI, IndusInd Bank, ICICI Bank, Bank of Baroda, with HDFC Bank the only 'buy' in the sector.
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"We will likely see liability consolidators (led by HDFC Bank, Kotak Bank, SBI) emerge stronger over the medium term but until the current NPA cycle peaks, we see downside risks to valuation multiples," it said in a recent report.
Banking stocks have been the most hit in 2020 amid the coronavirus crisis. Defaults at Yes Bank and PMC also weighed on the sentiment turning the investors cautious. The Nifty Bank index has declined over 38 percent in 2020 as compared to a 23 percent fall in the Nifty50 index.
Further, India expects bad debts at its banks - already at about $123 billion currently - could double after the coronavirus crisis brought the economy to a sudden halt, according to government and banking sources, Reuters reported on Sunday.
The report further noted that it is now moving closer to a stress case scenario in FY21-22 as it expects the current economic situation will drive paradigm changes in the sector in the near to medium term.
More than just the growth slowdown, It stated that the lenders are now on the verge of a new (and unique) NPA cycle panning across corp/retail segments lasting through at least FY21-22. Adding, it said that this will drive sector ROEs closer to cyclical lows and also raise cash call risk for most banks over the next 12-18 months.
It also expects the sector NPA ratio to increase by 2-4 percent, broad-based across segments with private banks outperforming.
The major concern is the lack of major alleviating factors in the near term as the various stakeholders remain hamstrung, it said.
Firstly, RBI's massive liquidity injections not having the desired effect due to various bottlenecks and risk aversion at banks. Secondly, government fiscal capacity to backstop NPA losses remains constrained given the social priorities and revenue slowdown. Thirdly, mid-size banks and NBFCs now forced to severely curtail their growth plans in the near term.
"As a result, we find it difficult to construct a bull case scenario in FY21, with some potential for surprises in FY22 if some of these bottlenecks are fixed along with global rebound," the report stated.
First Published: May 5, 2020 2:34 PM IST