UBS, a global brokerage firm has downgraded its stance on SBI Bank and Axis Bank to “sell” and “neutral”, respectively.
Key Highlights
- UBS flags a rise in loans to borrowers with weak profiles.
- The rise in unsecured loans in the books of banks could lead to defaults in future.
- It expects the credit costs for Indian banks in its portfolio to rise this fiscal year.
UBS on Friday cut down its rating for the shares of SBI to “sell” and Axis Bank to “neutral”. The brokerage firm has turned neutral on the banking sector of the country due to the share of unsecured retail loans rising excessively, and an expected regulatory tightening in future.
The brokerage firm contended that the share of borrowers with weak risk profiles has substantially increased in the books of the banks, which may hamper their profitability in future.
From a study it conducted, the brokerage firm found that the share of loans to borrowers with overdue loans has risen to 23% in 2022-23 as compared to 12% in 2018-19.
Similarly, the share of lending to borrowers with multiple retail loans recorded an increase, from 3.9% in 2017-18 to 9.3% in 2022-23.
This comes after the RBI flagged very high growth in certain components of personal loans, asking banks to bolster their internal surveillance mechanisms.
Issues UBS cited for the downgrade of SBI and Axis Bank
The recent downgrade of the SBI and Axis Bank by UBS is due to a similar trend observed in the lending profiles of the two lenders.
The brokerage firm reckoned that the share of unsecured loans as a percentage of the total lending in the books of SBI was 11.1%, while the same for Axis Bank was 10.7% in June, 2023.
The brokerage firm ruled out a re-evaluation of its rating of the two banks since it expects the credit costs for Indian banks under its portfolio to rise by 5 to 10 basis points in this fiscal year. This, it mentioned could lead to a compression of Net Interest Margin (NIM) and the shares of the two banks are more sensitive to the rising credit costs when compared with their peers.
