Extension of lockdown has raised fears of prolongation in economic recovery in the current fiscal year for India. Banking stocks have been seeing severe corrections on concerns over deteriorating asset quality on a possible rise in NPAs (non-performing assets) as businesses, especially small and medium scale, are expected to make losses due to the lockdown.
In a recent report, Bank of America Merill Lynch (BofAML) further downgraded its outlook on the Indian banking sector "as the various stakeholders remain hamstrung."
It said that RBI's liquidity injections are not having the desired effect due to various bottlenecks and risk aversion at banks. Another concern the American brokerage has is that the government fiscal capacity to backstop NPA losses remains constrained given the social priorities and revenue slowdown. Further, it said that mid-size banks and NBFCs (non-banking finance companies) are 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 said.
As for individual stocks, BofAML downgraded ratings for State Bank of India, IndusInd Bank, ICICI Bank, Bank of Baroda, and maintain 'buy' only on HDFC Bank in the sector.
"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.