Business Standard

Nomura cuts target prices for Axis Bank, SBI and BoB ahead of Fed meeting

Analysts at Nomura suggested that larger private banks are likely to experience a greater negative impact on their NIMs from the potential US Fed rate cuts compared to mid-sized & smaller banks.

Banks credit growth

Tanmay Tiwary New Delhi
Nomura on Indian banks: Tokyo-headquartered international brokerage firm Nomura has reduced its target prices for some of the private and public lenders ahead of the US Federal Reserve's policy meeting scheduled for next week.
 
The brokerage firm has reduced the target price for Axis Bank, State Bank of India (SBI) and Bank of Baroda (BoB) to Rs 1,370, Rs 980, and Rs 280 per share, respectively. Despite slashing their target prices, Nomura has maintained its 'Buy' rating for these banks.

Click here to connect with us on WhatsApp


“We reduce our target prices (TPs) for Axis Bank, SBI and BoB (while reiterating our ‘Buy’ ratings) as we lower our target multiple led by lower sustainable return on equities (RoEs). Our revised TPs for Axis Bank/SBI/BoB are Rs 1,370/Rs 980/Rs 280 (versus Rs 1,435/Rs 1,030/Rs 310 previously),” stated Param Subramanian, Ankit Bihani, Ajit Kumar and Parth Desai of Nomura, in a research note.
 

Analysts at Nomura suggested that larger private banks are likely to experience a greater negative impact on their net interest margins (NIMs) from the potential US Fed rate cuts compared to mid-sized and smaller banks, such as AU Small Finance Bank, IndusInd Bank, and Bandhan Bank. However, they highlighted that the smaller banks might face increased credit costs in their customer segments.

“Larger banks offer significant valuation comfort, and hence we do not see the need to move down the risk curve. We prefer stronger deposit franchises (with no loan-to-deposit (LDR) constraints), with stronger asset quality outlooks, higher return on assets (RoAs) to cushion earnings per share (EPS) from rate cuts and offering valuation comfort," they noted in their research report. 

Despite concerns, the brokerage’s top picks still remain Kotak Mahindra Bank, ICICI Bank, SBI and Federal Bank. 

“At a sector level, we struggle to see meaningful triggers for near-term outperformance. However, the longer term thesis for the sector remains intact amid a broad return on equity (RoE) delivery cycle and attractive valuations,” Nomura analysts added.

Meanwhile, here are the potential rate cut implications:

Impact on Net Interest margin (NIM)
 
According to Nomura, a potential 50 basis point (bp) repo rate cut could reduce NIMs by 15-20 bp for most large private banks, whereas the impact would be lower for SBI and mid-sized banks like IndusInd Bank and AU Small Finance Bank. 

Banks generally have 30-60 per cent of their loan books linked directly to the repo rate or external benchmarks, while their liabilities are on fixed rates, which reprice lower only on maturity. Consequently, the analysts believe that banks are negatively exposed to potential rate cuts. 

Additionally, about 14-22 per cent of term deposits mature in less than a year, with 65-70 per cent maturing in 1-3 years. Smaller private banks, such as IndusInd Bank, AU Small Finance Bank and Bandhan Bank, have a higher share of fixed-rate loans, resulting in a lower impact on NIMs, the report added. 

SBI, with a higher proportion of marginal cost of the fund-based lending rate (MCLR)-linked loans, is expected to experience a lower impact of 12 bp, compared to 15-20 bp for large private banks.

Impact on Return on Assets (RoA)
 
The ultimate effect on RoA is anticipated to be lower, at 5-10 bp for large banks, with no major impact for IndusInd Bank, AU Small Finance Bank and Bandhan Bank, analysts at Nomura noted. 

They added that the reduction in RoA is mitigated by potential mark-to-market gains on banks’ treasury books. Banks like Kotak Mahindra Bank, with larger available-for-sale (AFS) and held-for-trading (HFT) portfolios, benefit from this, believe analysts. 

PSU banks with higher modified durations on their bond portfolios, such as SBI and BoB, also gain, though this is offset by higher pension costs. Nomura's analysis indicated that a 50 bp rate cut will likely impact RoA by 5-10 bp for large private sector banks (excluding IndusInd Bank), while banks with higher fixed-rate loan books (such as AU Small Finance Bank, IndusInd Bank and Bandhan Bank) will not see a meaningful RoA impact. However, PSU banks like SBI and BoB, analysts said, are expected to experience an RoA impact of 6-8 bp.

Deposit growth and CASA may see a positive fillip
 
On the brighter side, deposit growth is expected to improve with a more accommodative policy stance from the RBI. Historically, in two of the last three rate cut cycles, current account saving accounts (CASA) ratios have improved, which helps cushion some NIM impacts. An improvement of 1 percentage point in CASA ratios, roughly translates into gains of 4-5 bps in NIMs, analysts opined.

CRR cut benefits vs LCR norms

A potential 50 bp cut in the Cash Reserve Ratio (CRR) could enhance NIMs by approximately 3-5 bp, analysts said. However, this benefit may be offset by the implementation of tighter draft Liquidity Coverage Ratio (LCR) norms, which are set to take effect in April 2025. They noted that the current CRR requirement of 4.5 per cent is still 50 bp above pre-COVID levels.


Don't miss the most important news and views of the day. Get them on our Telegram channel

First Published: Sep 10 2024 | 10:30 AM IST

Explore News