banks: CLSA slashes target price on banks by up to 70% amid loan slump

Mumbai: CLSA has cut its target price on Indian banks by 20-70 per cent as Covid-19 has disrupted an already struggling credit growth trend in the country as well as raised asset quality risks.

“The unprecedented disruption caused by Covid-19 and a 40-day national lockdown have put brakes on an already struggling credit environment. Our interactions with banks indicate that normalcy could be restored in two to three quarters depending on the severity of the disruption,” said CLSA.

Micro, small and medium enterprises (MSMEs) would be the worst hit segment but retail credit, especially unsecured in nature, is also likely to see some stress amid cases of retrenchments and pay cuts, said CLSA. Commercial vehicles, microfinance, commercial real estate and loans to weaker non-bank finance companies may also see stress, said CLSA. The foreign brokerage said credit growth of PSU banks is likely to see further slowdown as many of them are undergoing the merger process.

The brokerage has cut target price on IndusInd Bank the most, to ₹595 from ₹1,950. It has cut target price on Canara Bank, Union Bank, State Bank of India, Bank of Baroda, Axis Bank and Bank of India by 24-58 per cent. Target price on HDFC Bank, ICICI Bank, Kotak Mahindra Bank and Punjab National Bank has been cut by 19-27 per cent.

CLSA has cut loan growth estimates for state-owned banks by 9 percentage points for the ongoing financial year and by 4 percentage points for the next financial year. For private banks, those estimates have been cut by 10 percentage points for the current fiscal and 5 percentage points for the next.

The Reserve Bank of India has announced several measures to counter the impact of Covid-19, including 75 basis points cut in the lending rate and two reverse repo rate cuts: 90 bps the first time, followed by another 25 bps reduction.

“Rate cuts announced by RBI will weigh on margins as variable rate loans get repriced faster with external benchmarking. Banks with higher Casa (Current account and savings account deposits), lower loan-to-deposit ratio & higher slippages are likely to be impacted more,” said CLSA, cutting FY21 net interest margin (NIM) estimates for banks tracked by it by 5-25 basis points. Banks with higher exposure to problem segments are likely to see higher slippages but those with prudent underwriting standards are likely to fare better, said CLSA.