 "Bank")
The Ukraine war and associated sanctions and disruptions are leading to a stressful macro situation for India. Inflation, which is already high, is likely to spurt due to supply chain issues across multiple sectors and high energy prices. The RBI may be forced to raise rates to defend the rupee, especially if the US Fed proceeds to hike policy rates and to lighten its balance sheet. This could mean a downgrade to earnings expectations and market valuations.
The banking sector will be a key player. Some of India’s private banks are very highly valued and heavily owned by FPIs (foreign portfolio investors), and therefore, vulnerable to selling. Broadly, tighter monetary policy and higher interest rates are generally negative for financials.
In the last month, the Bank Nifty is down 8.5 per cent (it’s down 0.5 per cent in the last 12 months) and the Bank Nifty has a very high private banking weight. The Nifty Pvt Bank is down 8.5 per cent as well in the last month (down 6.3 per cent in the past 12 months) and the Nifty PSU Bank is down 10.5 per cent in a month (and up 17.2 per cent in the last 12 months).
The PSU Bank index has a current PE (last four quarters) of 9.2x while the Private Bank Index has a PE of 22x, which is slightly higher than the Nifty 50 itself. While some of the negative implications have been priced in, there could be further downsides. Banking has a high-beta, high-correlation, relationship with broader market indices, which means it could see more downside than the overall market if corrections continue. Equally, it would yield higher returns as and when optimism returns.
Apart from central bank action, and the impact of the Ukraine War, the biggest “unknown” risk is of another Covid wave, which could derail growth. The NPA slippage rates are one key metric for the sector – this trend looks positive with lower slippages in Q3. Credit growth has been low in the first three quarters of the fiscal but improved to around 9 per cent in Q3 and higher growth trends are usually associated with lower NPAs.
While the leader, HDFC Bank has seen stable RoA (return on asset) and RoE (return on equity) through the last three quarters, Axis Bank and ICICI Bank have seen strong improvements in RoE and RoA. Asset quality seems to have improved significantly for most private banks.
IndusInd Bank (IIB) has high exposure in the jewellery financing segment (Russia has a big market share in diamond mining) and every bank is likely to see pressures on vehicle finance given lower demand. In other retail products, IIB is hitting pre-covid volumes. The Microfinancing segment may see a small increase in incremental provisioning. IIB is likely to maintain its NIM at roughly the same levels and it has been able to control operating costs. There are some ‘Buy’ recommendations on IIB.
ICICI and Axis are being recommended as Buys by most analysts, while HDFC Bank is seen as a “Hold” rather than a buy though it seems capable of maintaining steady double-digit growth at around 15 per cent. ICICI Bank had an excellent Q3, 2021-22 with Pre-Provisioning Operating Profit growth at 25 per cent YoY, a lower Net NPA ratio of 0.85 per cent, excellent NIM at 3.96 per cent and RoE at over 15 per cent. Some analysts see a 35-40 per cent upside from the current market price.
