Nirmal Bang: Large Private Banks Best Placed, Regional And PSBs On A Weaker Footing
A customer holds a bundle of Indian rupee banknotes while filling in a deposit form at a branch of the HDFC Bank Ltd. in Mumbai, India (Photographer Dhiraj Singh/Bloomberg)

Nirmal Bang: Large Private Banks Best Placed, Regional And PSBs On A Weaker Footing

BQ Blue’s special research section collates quality and in-depth equity and economy research reports from across India’s top brokerages. These reports offer BloombergQuint’s subscribers an opportunity to expand their understanding of companies, sectors and the economy.

Nirmal Bang Report

The key takeaway from our analysis of loss absorption capacity estimates, moratorium data and historical track record of operating earnings delivery and capital raise is that large cap banks remain best placed in the current environment.

Most banks (under our coverage) have raised or are in the process of raising fresh capital, which should strengthen their balance sheet to guard against the anticipated surge in non-performing assets six to nine months down the line (by Q1 FY22).

As per our estimates, most balance sheets, except that of HDFC Bank Ltd. and Kotak Mahindra Bank Ltd. would be seemingly fragile without a dose of fresh capital, given the anticipated surge in NPAs.

Against a similar backdrop for regional private banks, the inherent balance sheet strength is expected to be relatively low with City Union Bank Ltd. being the strongest in terms of loss absorption capacity (3.2% of current loans).

In case of The Federal Bank Ltd. and DCB Bank Ltd., besides a low loss absorption capacity, what adds negatively to our risk perception and an already cautious stance is the relatively higher moratorium number (last reported).

Public sector banks (PSBs) continue to remain the weakest of the lot with our preference inclining towards State Bank of India given the franchise and low standalone valuation.

In the context of the current and expected banking landscape, we attempt to derive comfort from the quality of historical earnings and provisioning trends.

Over FY10-21E, we estimate large/mid cap/regional private banks to have consumed 29-31% of their cumulative operating profits and capital raise to provide for loan losses.

Click on the attachment to read the full report:

Nirmal Bang Banking Sector Update- 15 September 2020.pdf

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