The Nifty Bank index shed nearly 1 percent on October 13, led by losses in Axis Bank and SBI after the lenders were downgraded by UBS.
While Axis Bank fell more than 2 percent, SBI shares were down 1.5 percent intraday on the NSE after the international brokerage house lowered their ratings on concerns of a rise in credit losses. "Indian banking sector's risk-reward is turning equal," UBS said.
"We raise our credit cost forecasts for the India banks we cover by 5-10bps in FY25," UBS said in its report, adding that SBI and Axis Bank's Return on Assets (RoAs) are more sensitive to credit cost changes than large peers. The brokerage estimates FY25 EPS for SBI and Axis Bank at 22 percent and 10 percent below consensus.
SBI downgraded on narrow margins, rising credit costs
From the 'buy' rating, UBS has downgraded SBI to 'sell', and cut the target price to Rs 530 from Rs 740 as it raised credit costs by 10bps and cut the EPS by 5 percent. The downgrade is attributed to anticipated declines in RoA and Return on Equity (RoE) by FY25. The bank's narrowing margins and increasing credit costs are seen driving these potential declines.
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Considering relatively low CET1 versus peers, potential regulatory tightening on unsecured loans would limit loan growth or trigger dilution for SBI. The stock at one-time FY25 price to book value does not appear expensive but a likely decline in profitability may result in downside, analysts at UBS noted. The brokerage warns that SBI could face escalating credit costs, and its ability to manage these costs while maintaining profitability will be crucial in the coming years.
Limited upside seen in Axis Bank
The Axis Bank stock has been downgraded to 'neutral' and its price target has been lowered to Rs 1,100 from Rs 1,150. The private lender's margins are peaking and credit costs are near bottom. Its RoA is set to to contract in FY25, said UBS. In the next three quarter, single-digit growth is expected in net interest income (NII). The brokerage sees limited upside potential in the stock.
In the last one year, the Axis Bank stock has risen around 24 percent, outperforming the Nifty Bank index which has risen 14 percent during this period. Public sector lender SBI has underperformed Nifty Bank in the past year, rising around 10 percent.
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The Nifty Bank index is trading at 1.9x one-year forward P/BV, below its 2.2x 10-year average. While valuation seems inexpensive to UBS analysts, they see limited scope of a re-rating, considering expectations of slowing earnings growth, owing to potential NIM compression and an uptick in credit cost. It also sees increasing default risks in retail unsecured loans, which is likely to push up banks' credit losses by 50-200bps. The risk of regulatory tightening is high, it said.
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