Goldman cuts earnings outlook for Indian banks

GoldmanGoldman Sachs has cut its earnings estimates for Indian banks by around 40 percent on average on account of increased provisions on deferred loans and a sharp fall in operating profit.

The brokerage has downgraded Axis Bank to sell from neutral and cut target price to Rs 323 from Rs 417 as it believes continued challenges on asset quality and weak operating profitability will weigh on earnings. The brokerage has downgraded mortgage lender HDFC to neutral from buying and lowered target price by 16 percent to Rs 1,625 due to subdued outlook for the underlying mortgage business and continued elevated credit spreads in bond markets.

It has removed ICICI Bank from its coverage list but maintained a buy rating. The brokerage is bullish on HDFC Bank, Kotak Mahindra Bank, and Bandhan Bank within banking space, all of which are rated buy. Within NBFCs, Goldman prefers Bajaj Finance, Aavas, Shriram Transport, and L&T Finance. Goldman Sachs has a sell recommendation on IDFC Bank, Punjab National Bank, Mahindra & Mahindra Financial Services, PNB Housing, and LIC Housing, given the weak fundamentals. The brokerage said 25-75 percent of loan books are in an extended deferral for private banks and non-bank finance companies compared to sub-1 percent to 10 percent in other select countries. This has put a spotlight on retail asset quality.

Deferred loans could pose a big problem as almost two-thirds of the country’s retail loan book or nearly $268 billion of the total retail portfolio of $420 billion lies in red zones across 120-odd districts. The brokerage is factoring in slippages of 20 percent on average for moratorium books in FY21, roughly 5-6 times the average for the past five years.

We cut operating profit expectations by up to 40 per cent/41 percent in FY21/FY22, on lower loan growth and lower revenue, driven by lower fee income and pressure on margins due to elevated NPL formation,” said Goldman Sachs. If slippages were to rise beyond 25 percent on the moratorium book, select banks such as IDFC First, IndusInd, Axis Bank, and state-owned banks would start witnessing pressure on capital ratios.


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