Among individual banks, the BofA upgraded Axis Bank and IndusInd Bank to 'buy' and SBI to 'neutral'.
2020 was not the best year for the banking sector, however, in a recent report, BofA Securities said that it has turned more positive towards the Indian banking sector.
"A surprisingly resilient asset quality outlook and still reasonable valuations are the key drivers of our positive view over 2021. We acknowledge stretched tactics near term and potential for some volatility in the first half of FY21 as the NPA recognition cycle begins. But on a 12-month view, we see risk-reward attractive as growth will likely surprise positively for the bigger banks in the second half of the financial year," the brokerage said in the note.
Among individual banks, the BofA upgraded Axis Bank and IndusInd Bank to 'buy' and SBI to 'neutral'. It added that the HDFC Bank is still its core holding and sees further re-rating potential in ICICI Bank, Axis Bank, and IndusInd Bank.
Let's take a look at the reasons the brokerage is turning bullish on the lenders:
1) Asset quality: No longer an existential risk – From being seen as an existential risk in mid-2020, Indian banks’ asset quality has been surprisingly resilient. Channel checks further support a few risks of negative surprises near term.
2) Signs of growth improving, likely to be the theme in 2H – New disbursals are already back to above pre-COVID levels in most segments. After NPA recognitions are dealt with in 1H, BofA expects growth tailwinds to emerge in 2H.
3) Capital and liquidity have never been better – This should help cushion downside risks from AQ/NIMs and help further consolidate market share gains in 2021.
4) Regulatory support to remain a tailwind – Various govt and RBI measures have been a major help for asset quality in 2020 and will likely support growth revival in 2021.
5) Valuations still not expensive for the majority –remain attractive in the historical context, especially if better capital levels and lower cost of equity are factored in.
However, factors like elevated NPA, lackluster growth recovery remain key risks to the medium-term investment thesis, pointed out the brokerage.
(Edited by : Abhishek Jha)