Global brokerage firm UBS has expressed a cautious outlook on select Indian banks and non-banking financial companies (NBFCs), driven by rising concerns over increasing non-performing loans (NPLs) and weakening portfolio quality. While the firm continues to favor certain leading banks, it has adjusted its target prices downward for several key players, signaling a mixed sentiment in the banking and financial services sector (BFSI).
Target Price Revisions for Banks
UBS has maintained a neutral rating for IndusInd Bank, Axis Bank, and AU Small Finance Bank but has reduced their target prices.
- IndusInd Bank: The target price was lowered from ₹1,350 to ₹1,150 per share.
- Axis Bank: The target was revised downward to ₹1,210 from ₹1,250.
- AU Small Finance Bank: UBS reduced its target to ₹640, down from ₹750.
At the same time, UBS reaffirmed its positive stance on HDFC Bank, ICICI Bank, and Federal Bank, which it continues to rank as its top picks in the BFSI space.
Stock Market Reaction
As of 9:15 AM IST on December 13, 2024, shares of the affected banks reflected mixed reactions:
- Axis Bank: Trading down by 0.4% at ₹1,141.10 per share.
- IndusInd Bank: Marginally lower, quoting ₹997, down by 0.1%.
- AU Small Finance Bank: Witnessed a 1% decline, with its stock price falling to ₹585.20.
Key Concerns Raised by UBS
UBS has flagged multiple challenges for Indian lenders and NBFCs, emphasizing the following risks:
- Rising Non-Performing Loans (NPLs):
The brokerage highlighted increasing risks in segments like commercial vehicle (CV) loans and business loans, where portfolio quality appears to be deteriorating. Static pool analyses of recent loan disbursements indicate weaker credit performance. - Higher Credit Costs:
For NBFCs, UBS revised its credit cost estimates upward by 1–20 basis points for FY25 and FY26, reflecting anticipated challenges in maintaining asset quality. This adjustment indicates higher provisioning requirements, potentially impacting profitability. - Lower Earnings Forecasts:
The brokerage reduced earnings per share (EPS) estimates for key NBFCs, including Bajaj Finance, Cholamandalam Investment, Shriram Finance, and M&M Finance, by 1–7%. This cut reflects the anticipated pressure on earnings due to increased credit costs and weakening asset quality. - Sector-Wide Adjustments:
Credit cost estimates were raised by 2–25 basis points across multiple lenders, reinforcing UBS’s outlook on rising NPL trends.
Top Picks in the Sector
Despite the concerns, UBS remains optimistic about certain banks:
- HDFC Bank: Known for its stable asset quality and consistent growth, HDFC Bank continues to be a reliable investment option in the BFSI sector.
- ICICI Bank: The bank’s strong fundamentals and well-diversified portfolio contribute to its top-ranking status.
- Federal Bank: With a focus on robust risk management and a relatively strong regional presence, Federal Bank also retains its position as a UBS favorite.
Broader Implications for NBFCs
NBFCs have faced a tougher operating environment, with UBS highlighting increased vulnerabilities in the commercial lending and retail finance segments. Rising credit costs, coupled with a decline in portfolio quality, suggest that the sector could face headwinds in the near term.
Market Context and Recommendations
The banking and financial sector in India has been undergoing structural changes due to regulatory reforms, shifting credit demand, and evolving macroeconomic conditions. While leading banks like HDFC Bank and ICICI Bank are well-positioned to capitalize on these changes, mid-sized and smaller lenders may face challenges.
Investors should note UBS’s cautious approach and focus on quality picks with strong fundamentals. The revised target prices reflect the need for prudence in assessing risk-reward ratios in the current market environment.
Disclaimer
The views and recommendations shared by UBS are based on its analysis of market trends and individual company performances. Investors are advised to consult certified financial advisors before making investment decisions.
Conclusion
UBS’s recent revisions highlight the growing challenges in the Indian BFSI sector, particularly for mid-sized banks and NBFCs. While the top-tier banks continue to demonstrate resilience, rising credit costs and deteriorating portfolio quality are key risks for the broader industry. Investors should remain vigilant, prioritizing institutions with strong fundamentals and a track record of stability in navigating market fluctuations.