The Q2FY21 performance and management commentary calmed the nerves on the banking sector on the back of a steady performance. The collections trend saw a considerable improvement while initial commentary from management, industry data suggests the quantum of restructuring would be lower than anticipated earlier. Led by home, auto loans, ECLGS, disbursement are touching pre-Covid levels with further improvement expected ahead. This has been reflected on the Bank Nifty as well wherein after underperformance of ~19% in March-September 2020, the index have revived outperforming the Nifty by ~22% from September till date.
Given optimism creeping in over a faster-than-expected revival, mixed with caution over the actual outcome in the coming quarter for restructuring, ICICI Securities expect the stock price of lenders (banks, NBFCs) to remain slightly volatile in the near term.
“We continue to expect the positive impact of structural changes undertaken in the long run. Improving repayment rates, collection efficiencies and credit offtake seem promising. We prefer large private banks given adequate capital and liquidity which makes them well paced to garner incremental market share,” says ICICI Securities.
The brokerage recommends Axis Bank and IDFC First Bank among banks and SBI Life among non-lenders. Large NBFCs could remain beneficiaries of recent working paper pertaining to new banking license.
CMP: ₹628, Target Price: ₹710, 13% upside
ICICI Securities Report says that Axis Bank has not seen much demand for loan restructuring from customers till now. Along with that, increasing levels of demand resolution over past few months is encouraging. Also, recent management commentary suggests a strong pick-up in consumption led business during festive season, demand for home loans have been increasing and secured business are back to pre-Covid levels.
IDFC First Bank
CMP: ₹37.40, Target Price: ₹45, 20% upside
The robust trajectory of deposit growth for IDFC First Bnk is demonstrating earlier targeted focus on building retail franchise. The bank is well on track to rebalance asset portfolio shifting towards retailsegment with target of 70% of advances to be contributed by retail. The bank is undertaking continued pruning of corporate exposure.
Request for restructuring by the IDFC First Bank’s customers is in low single digits. Contingency buffer of ~2.2% of advances (including release of | 800 crore pertaining to Vodafone) provides adequate cushion.
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