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Last Updated : May 13, 2020 01:41 PM IST | Source: Moneycontrol.com

Banks, NBFCs may have tougher days ahead; HDFC twins better placed

Experts point out for banks, the next two quarters would be difficult in terms of growth and asset quality.

 
 
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As the COVID-19 led lockdown has caused a complete standstill for economic activities, the risk of severe deterioration of finances of corporates has grown stronger which may result in weakness of the asset quality of the banks.

Nobody knows how and when COVID-19 will come under control. Even its economic fallout cannot be assessed precisely at this juncture. While the pain is across sectors, financials have a lot to endure as they have the grave risk of rising NPAs.

Experts point out for banks, the next two quarters would be difficult in terms of growth and asset quality.

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The problems for NBFCs may be even bigger as they might suffer on the front of liquidity too.

"For NBFC, it looks more difficult as only a few large corporate-backed NBFCs are able to raise capital. A smooth flow of liquidity is of utmost importance for NBFCs in the current scenario. NBFC will also struggle for growth and pressure on asset quality would increase," said Jaikishan Parmar, Senior Equity Research Analyst, Angel Broking.

The banking sector is heavily impacted due to a fall in credit growth, profitability and a rise in the risk of new NPA.

Vinod Nair, Head of Research at Geojit Financial Services underscored that credit growth of banks fell to 6.1 percent in FY20 and is expected to be negative in FY21 to date.

"Banks will underperform the market unless it finds measures to improve business outlook and business risk. A solid stimulus by the government to unprivileged sectors and MSME will provide relief to the economy but only to the extend by adding sustenance," Nair said.

"Concerns will prevail like cashflow management, post end of the moratorium and new NPAs. Recent quarterly numbers from large private sector banks have not been encouraging as higher provisions and credit cost has hurt the overall performance. Currently, in the short to medium term, we have a cautious view for Banks while in long-term basis valuation are attractive."

Nair pointed out that NBFC’s are in a better position today in terms of liquidity and banks are extending the moratorium, but the outlook for business continues to be weak with higher funding cost.

"Housing finance will be affected with weak real estate outlook, fall in prices and low construction activities. The only positivity is that the valuation of NBFC has become very cheap," said Nair.

HDFC twins better placed

HDFC Bank and HDFC remain favourites of most brokerages and analysts amid the turmoil

Geojit Financial Services has a buy recommendation on the stock with a target price of Rs 1,134.

"In the banking space, we recommend HDFC Bank with a target price of Rs 1,134. Recent Q4 numbers witnessed an increase in deposits and an overall improvement in net interest margins (NIMs). Even though there has been a decline in new loans, the bank's robust network and strong asset quality will pave way for better growth in the long-term," Nair of Geojit Financial Services said.

Nair is of the view that the near-term concerns like the shift in management and exposure to unsecured loans given the ongoing economic trouble and issue caused by COVID-19 seems fairly priced.

Brokerage firm Anand Rathi Shares & Stock Brokers has a target price of Rs 1,330 on HDFC Bank.

"The bank reported steady asset quality with a sequential fall in GNPA at Rs 12,650 crore and nearly 16 bps reduction in GNPA ratio to 1.26 percent. Excluding moratorium provided by RBI, the GNPA ratio would have been up 10 bps at 1.36 percent, which is still prudent. Till now, the only low single-digit proportion has availed moratorium. Slippages came in at Rs 3,150 crore which constitutes only 0.3 percent of advances," Anand Rathi said.

Anand Rathi has a buy recommendation on HDFC also, with a target price of Rs 2,539.

"We believe HDFC will continue to benefit from its strong market position, continued growth in loans, healthy asset quality and stable spreads. In terms of macro scenario, the domestic mortgage has plenty upside with low penetration levels. Also, favorable government policies and initiatives focused on affordable housing create impetus in the housing sector," said Anand Rathi.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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First Published on May 13, 2020 01:08 pm
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