Nifty Bank gains 3.5%, hits 10-week high; Axis Bank soars 8%, ICICI Bank 5%

Bluechip financial counters such as Axis Bank, ICICI Bank, and State Bank of India lifted the markets on Friday as analysts turn positive on the sector. That apart, August Futures and Options (F&O) series, which ended on August 27, saw strong participation from banking sector underlying optimism in the space.

According to global brokerage UBS, the economy is recovering gradually, as suggested by high frequency data, lowering the risks of bad loan formation. "The recent capital infusion (over US$10bn) in some banks/non-banking financial companies (NBFC) would be additional cushion. We cut our FY21/FY22 estimates for GNPL formation from 7%/5% to 4%/5% of loans. Bank stocks are down 12-62% YTD and have underperformed the broader markets. We think the sector’s downside risks are limited," they said in a recent report.

As regards the F&O expiry, IIFL Securities said in an August 28 report that Bank Nifty index outperformed the Nifty index by a whopping 5 per cent, reversing the underperformance of the previous series, with both the indices closing 9 per cent/4 per cent higher. Long gamma positions were the flavour of the series as the option writers ran for cover on account of a sharp delta move in the Bank Nifty index.
 

According to their analysis, IndusInd Bank and Kotak Mahindra Bank saw the highest rollovers -- among private peers - at 97 per cent each. ICICI Bank saw rollover of 95 per cent; HDFC Bank (94 per cent); Axis Bank (91 per cent); and Federal Bank (70 per cent).

Meanwhile, Bank of Baroda saw highest rollover in the PSB space at 96 per cent, followed by SBI at 94 per cent; Canara Bank at 83 per cent; and Punjab National Bank at 63 per cent.

"The Bank Nifty saw significant fresh open interest (OI) addition on August 27. While August series saw closure of 0.23 million shares, September series added almost 0.7 million shares in the last sessions. The roll spread in the banking index has remained negative despite continued recovery. We believe it will also witness some pressure during the settlement as short rollover is likely to be seen," cautioned analysts at ICICI Securities.

On Friday, Nifty PSU Bank index surged 5 per cent in the intra-day trade today to hit a high of 1,604 level. Nifty Bank, on the othe rhand, rallied 3.5 per cent, hitting a 10-week high of 24,439. Nifty Private Bank index hit a high of 13,428 on the National Stock Exchange (NSE), up 3.5 per cent in the intra-day trade. In comparison, the benchmark Nifty50 hit a high of 11,686 on the NSE, up nearly a per cent.

Private Banks surge 
 

On Friday, Axis Bank jumped 8 per cent on the BSE with a combined 35.69 million shares changing hands on the NSE and BSE till the time of writing of this report. The stock was ruling nearly 7 per cent higher on the benchmark S&P BSE Sensex at 11:41 am and was the top gainer on the index. 

UBS, in a report dated August 27, revised the target price on the stock from Rs 600 to Rs 650 with a 'Buy call as it believes the bank has favourable loan mix changes, may gains from its physical and digital networks, and has lower credit cost. Management’s strategy is likely to support its asset quality, in their view.

"We estimate ROE of 8 per cent/12 per cent in FY21/FY22 due to high asset quality risks and a slowing loan book, but we expect ROE to bounce back to about 15% in FY23-FY24. Since its recent share price correction, we consider valuation reasonable. Among the Indian banks we cover, we continue to prefer Axis Bank as we think its retail franchise is strong and valuation inexpensive," it said in the report.

That apart, IndusInd Bank surged another 6 per cent today, after rallying nearly 10 per cent on Thursday. UBS has upgraded the stock from 'Sell' to 'Buy' and has increased the target price from Rs 360 to Rs 650. "Recent regulatory relief could help ease the NPL burden for INDUSIND and mitigate the tail risks of accelerated defaults in the near term. The recent capital infusion of Rs 3300 crore further strengthens the capital buffer. On top of this, we think liquidity risks have reduced as the wholesale funding market is flush with liquidity. Although we expect INDUSIND’s business model to change, resulting in lower return ratios (ROA) than past cycles, we think the current valuation (1.0x FY21E P/BV) appears inexpensive and prices in most negatives," the report said.

The brokerage has also raised target price of ICICI Bank from Rs 480 to Rs 520, with a 'Buy' call on the back of its strong retail franchise and moderate asset quality risks. "Since its recent share price correction, we consider valuations reasonable. We also believe it is well positioned to gain retail market share due to its strong digital footprint. With moderate asset quality risks versus peers, strong retail liability franchise and digital footprint, and strong employee morale in management, we expect ICICI Bank to trade at a premium to its five-year average multiple," it said.

Analysts at IDBI Capital also initiated coverage of the stock with a 'Buy' call and target price fixed at Rs 460. 

"ICICI Bank is well prepared among its peers to weather the COVID-19 storm with highest PCR (at 75 per cent), highest Covid-19 provisions (1.3 per cent of advances), and higher home loan portfolio (31 per cent of advances). Strong liability franchise and higher Tier I capital ratio will advantage bank when the economy growth recovers. We expect credit growth for the bank to remain higher than the banking industry led by market share gain. We expect loan growth and margin to improve, thus resulting into 50bps YoY improvement in ROA over FY20- FY22E to 1.3 per cent," it said in an August 27 report. While the uncertainty over the impact of Covid-19 would weigh on the valuation in the near term but we expect ICICIB to emerge stronger given strength in its business model, they said.

Other private banks such as Federal Bank advanced 9 per cent on the BSE, RBL Bank (5.6 per cent), IDFC First Bank (5.1 per cent), and HDFC Bank (1.1 per cent).

Public Banks outrun private peers

Among PSBs, Canara Bank surged 8.4 per cent, Bank of Baroda (7 per cent), Bank of India (6.6 per cent), SBI (4 per cent), and PNB (4.8 per cent).

"Recent regulatory guidelines on restructuring and current account operations are positive for SBI, in our view. SBI is well capitalised compared with peer SOE banks; SBI had a provisioning coverage ratio (PCR) of 86.3 per cent as of June 2020... The banking business (excluding subsidiaries) is trading at a historically low valuation (0.3x FY21E P/BV), which we believe prices in most negatives. We believe current valuation is inexpensive and could fuel a re-rating," said UBS in its recent report. The brokerage has upgraded the stock from 'Sell' to 'Buy' and has assigned a target price of Rs 260 from Rs 160.

Those at JM Financial, on the other hand, believe that the thesis of SBI stock price tracking overall domestic economic trajectory continues to play out. Besides, lower moratorium levels, reasonable capital buffers, sudued risks from YES Bank stake, and cheap valuations make it an attractive pick.

"Despite the 43 per cent rally since lows, we believe the core banking franchise still remains undervalued (at 0.43x /0.42x FY21E/FY22E BVPS, considering a 20% holdco discount for listed subs). We believe any further semblance of normalcy in the macro-economic environment could see reflecting in greater valuations for SBI," they said in a reprot dated August August 27. They have 'Buy' call on the stock with a revised target price of Rs 300 from Rs 230.