A recent report from YES Securities provides a comprehensive analysis of the Indian banking sector, focusing on the impact of recoveries from written-off accounts on bank profitability and offering updated stock targets for various lenders, including HDFC Bank, ICICI Bank, and State Bank of India (SBI).
Understanding Recovery Dependence
YES Securities examined the dependence of profitability on recoveries from written-off accounts across eight key Public Sector Undertaking (PSU) banks. The analysis revealed a sharp variation among lenders. State Bank of India (SBI) and Bank of Baroda (BoB) demonstrated low absolute dependence, with recoveries contributing just 0.1% and 0.2% of their average assets to Return on Assets (RoA), respectively.
In contrast, banks such as Punjab National Bank (PNB), Canara Bank, and Bank of Maharashtra (BoM) showed higher dependence, with recoveries accounting for 0.3%, 0.3%, and 0.4% of their average assets, respectively. This differentiation underscores the varying financial health and operational efficiency within the PSU banking landscape.
Stock of Written-Off Accounts Remains Significant
The report highlighted that the balance of written-off accounts remains substantial for most PSU banks, ranging from 6.4% to 7.4% of their total loan books as of the latest financial year-end. SBI stands out as an exception with a lower figure of 3.3%. YES Securities noted that these balances are significant in absolute terms and are unlikely to diminish rapidly, suggesting a prolonged period for banks to manage and recover these assets.
Recoveries from written-off accounts in the last fiscal year ranged between 5.3% and 11.1% of opening balances across the eight-bank universe. At this pace, the residual pool will take years to run down, allowing banks time to offset the erosion through gradual improvements in Net Interest Margin (NIM), fee income, and operational expenditure control.
YES Securities' Top Stock Picks and Targets
Based on their detailed analysis, YES Securities has updated its stock preferences and target prices for several prominent banks:
PSU Bank Preferences:
- Bank of Baroda (BoB): Target Price: Rs 375
- State Bank of India (SBI): Target Price: Rs 1,400
- Bank of Maharashtra (BoM): Target Price: Rs 105
- Indian Bank: Target Price: Rs 1,125
Broader Banking Sector Pecking Order:
- Bank of Baroda (BoB)
- HDFC Bank Ltd: Target Price: Rs 1,075
- Axis Bank Ltd: Target Price: Rs 1,715
- Kotak Mahindra Bank Ltd: Target Price: Rs 525
- ICICI Bank: Target Price: Rs 1,850
- State Bank of India (SBI)
Midcap and Smallcap Picks:
- Preferred Midcap Bank: Bank of Maharashtra (BoM)
- Preferred Smallcap Bank: DCB Bank (Target Price: Rs 240)
Least Preferred:
- RBL Bank Ltd (Target Price: Rs 430)
- IDFC First Bank Ltd (Target Price: Rs 95)
YES Securities has assigned a 'buy' rating to all its preferred stocks, while RBL Bank and IDFC First Bank have been given an 'add' tag.