Nifty Bank index was the clear winner in trade on November 3, 2020 having settled higher by a sharp 3%. In the previous trading session also banking stocks showcased phenomenal performance and the traction in banking names is seen of late after Q2FY21 results suggests that banking sector managed to sail through the Covid 19 blow rather unfazed.
Brokerage firm Credit Suisse is bullish on Indian private sector banks on the rationale that these may see revival in earnings earlier than expected as indicated by their second quarter earnings. The collections for the quarter had been 95%, or in the range of few percentage points, of pre-Covid levels, said the brokerage in its report.
Asset Quality At Private Banks Stood Reasonably Well As Against Other Peers
Also, during the September ended quarter, an increase in corporate stress pool as well as likely restructuring was only 2 percent of loans. Besides, the asset quality at these private sector lenders' came in better than other peers in consumer-focused businesses and was at levels comfortable enough to push banks to pursue growth.
Besides in segments that saw severe disruption due to Covid 19, including Consumer Vehicle and micro finance businesses (MFI), bank collections had been at more than 90 percent.
Spreads on lending has also increased by 40-60 bps over the last year as the decline in funding cost surpassed the decline in lending yields, resulting in steady net interest margins or NIMs. Moreover the brokerage noted that this parameter together with collections being at over 90% of pre-Covid levels and controlled operational expenditure caused the cost to income to stabilize, helping banks in realizing pre-provision profitability to the tune of 2.5-3.5% of assets.
Non-performing loan or NPL cover over 75% at private banks
NPL cover at private banks as of now is over 75 percent and additionally they take into account 1-2% of loans for Covid 19 provisioning. "Therefore, even as a post-moratorium pick-up in NPL slippage is likely in 2H21, we build in credit cost moderation from 2H21 for the larger banks (ICICI Bank, Axis Bank, HDFC Bank) and FY22 for IndusInd Bank," the brokerage said.
3 Private Banks With Upside Potential Of Up To 32%: Credit Suisse
In view of all of the above factors, brokerage firm Credit Suisse anticipates 28-32 percent upside in ICICI Bank and Axis Bank. And for IndusInd Bank, the firm has upgraded the stock from 'underperform' to 'outperform' with a target price of Rs. 700, which is a 11% upside from the stock's closing price as on November 2, 2020 of Rs. 628.35 per share