On account of increased provisions on deferred loans and sharp fall in operating profit, Goldman Sachs has cut its earnings estimates for Indian banks by around 40 percent on average.
Among banks, it has maintained a "buy" rating on Bandhan Bank, HDFC Bank, Kotak Mahindra Bank and ICICI Bank. The price target on Bandhan Bank has been cut from Rs 296 to Rs 275, on HDFC Bank from Rs 1,142 to Rs 1,094 and on ICICI Bank from Rs 373 to Rs 415. On Kotak Mahindra Bank, the price target was raised from Rs 1,431 to Rs 1,454.
Goldman Sachs has a "neutral rating" on SBI, Bank of Baroda, IndusInd Bank and Yes Bank. The price target on SBI was cut from Rs 218 to Rs 186, on BoB from Rs 50 to Rs 43, on IndusInd Bank from Rs 459 to Rs 393 and on Yes Bank from Rs 10 to Rs 9.
On PNB, Axis Bank and IDFC Bank, it now has a "sell" rating. The price target has been cut on Axis Bank from Rs 417 to Rs 323, on IDFC Bank from Rs 20 to Rs 18. On PNB, price target remained unchanged at Rs 27.
Within NBFCs, Goldman prefers Bajaj Finance, Aavas, Shriram Transport and L&T Finance, while it has a sell recommendation on Mahindra & Mahindra Financial Services, PNB Housing and LIC Housing.
It has downgraded its rating from buy to neutral on Housing Development Finance Corporation (HDFC) and has lowered target price by 16 percent to Rs 1,625 due to subdued outlook for the underlying mortgage business and continued elevated credit spreads in bond markets.
Goldman Sachs said 25-75 percent of loan books is in an extended deferral for Indian private banks and non-bank finance companies (NBFCs) compared to sub-1 percent to 10 percent in other select countries, putting a spotlight on retail asset quality.
Deffered loans (due to moratorium) is a problem as two-thirds of the country's retail loan book or nearly $268 billion of the total retail portfolio of $420 billion lies in red zones across 120-odd districts.
The brokerage is factoring in slippages of 20 percent on average for moratorium books in the current financial year, roughly 5-6 times the average for the past five years.
"We cut operating profit expectations by up to 40 percent/41 percent in FY21/FY22, on lower loan growth and lower revenue, driven by lower fee income and pressure on margins due to elevated NPL formation," said Goldman Sachs.
If slippages were to rise beyond 25 percent on the moratorium book, select banks such as IDFC First, IndusInd, Axis Bank and state-owned banks would start witnessing pressure on capital ratios.