Should you invest in these 3 banking stocks?

Our analyst looks at SBI, HDFC Bank and ICICI Bank to evaluate their investment worth.
By Morningstar Analysts |  06-12-16

Over the past few quarters, the key concern for the Indian banking sector has been the level of nonperforming assets, or NPAs.

Last week, Business Standard reported that public sector banks have seen nearly Rs 80,000 crore increase in gross NPAs in the three months ended September 2016. As on September 30, gross NPAs of these banks rose to Rs 6,30,323 crore as against Rs 5,50,346 crore on June end.

But Morningstar equity analysts remain positive on the privately owned bank’s ability to acquire deposit and loan market share in the medium term from struggling public sector banks.

The recent lowering of the policy interest rate by 0.25% has not changed analysts’ forecasts, as net interest margin has been pressured from declining rates for some time and lower interest rates are already factored into their near-term forecasts.

Here, we contrast the largest state-owned bank and two private sector banks.

SBI is India’s largest banking franchise with more than Rs 20.5 trillion in deposits garnered from more than 16,300 branches. The Indian government holds a majority stake in the bank and directs one third of SBI’s loan portfolio toward sectors it prioritizes, such as agriculture and small-business enterprises, and 14% toward infrastructure companies. These sectors typically suffer higher defaults and are the main drivers of rising NPAs.

We believe public-sector banks are less stringent on credit quality and focus on meeting government directives. The pileup in NPAs for these sectors and rising credit cost are a main drag on profitability for SBI over the near term. Asset quality continued its downward trend in fiscal 2016, with NPAs now forming 6.5% of gross loans.

A weaker-than-peers balance sheet and allowance coverage for bad debt could see the bank grow at a slower pace and additional equity funding needed to bolster its capital position.

Morningstar has increased its uncertainty rating to Very High on the basis of a downside scenario in which rising NPAs see the bank needing to recapitalize its balance sheet.

On the other side of the coin is HDFC Bank. With close to Rs 8 trillion in assets and more than 4,500 branches, it is one of India’s largest non-government owned banks. The bank’s prudent lending policy has resulted in superior asset quality relative to peers. For example, competitors Axis Bank and ICICI Bank recognized their bad loans in a recent review of NPAs with the Reserve Bank of India. HDFC Bank did not need to recognize additional stressed assets.

Asset quality remains steady for HDFC, with NPAs largely holding at 94 basis points of total loans for fiscal 2016 (much below the 1.5% threshold for high-quality banks). A healthy loan book sees the bank’s provisioning level averaging 0.6% of total loans during the past five years, resulting in higher profitability.

With its stronger liquidity and capital position relative to peers, HDFC Bank should be able to further acquire deposit and loan market share in the medium term, as higher levels of NPAs will remain a drag for the bank’s public peers.

ICICI Bank will continue to gain market share from public-sector banks in India, and that it is positioned well for the country's long-term economic growth prospects. However, the bank's NPAs remain elevated, and we expect its growth rate to lag that of its higher-quality peer HDFC Bank.

banks

All the above figures are in Rs

You can read a detailed analysis of each of the above banks here.  

Add a Comment
Please login or register to post a comment.
<>

Most Popular Articles

 (Last 3 months)
Top
Mutual Fund Tools
Feedback