“Lending being a leveraged business faces significant valuation risks in such an uncertain environment. However, bank subsidiaries that have gained significant scale/profitability are relatively well placed to withstand the current environment,” said Nitin Aggarwal, an analyst tracking the sector with Motilal Oswal Securities.
In view of Covid-19-induced disruptions, the government suspended of filing of fresh cases for insolvency proceedings under the insolvency and bankruptcy code (IBC) for the next 12 months. Analysts at Emkay Global Financial Services believe that this will be a setback for banks looking for resolution/liquidation under the legal umbrella. The brokerage firm believes that the first order of asset quality impact of Covid-19 will be seen in retail/SME, followed by another wave of corporate NPAs with demand for moratorium extension/forbearance/restructuring on the rise amid extended lockdowns.
Among individual stocks, State Bank of India (SBI) hit an over four-year low of Rs 152.50 on Tuesday, falling 21 per cent in past one month on the NSE. Bank of Baroda (BoB), Punjab National Bank (PNB) and Union Bank of India also traded at their respective multi-year lows and down in the range of 2 per cent to 4 per cent.
Given the developments, analysts see more pain in store for the financial sector, especially banks, and suggest investors remain selective. Large banks, they feel, can still weather the storm even though they still will not be completely insulated from the fallout of Covid-19 pandemic.
“Banks had been under pressure for quite some time now. There was business de-growth in some cases, which in turn impacted their financial performance. Then came the Covid-19, which has dealt a severe blow to their business. While most PSU banks will see an impact, the larger ones can still survive the impact. Among the lot, SBI and Indian Bank seem to be better off and valuation also seems attractive from a 12 – 24-month perspective” says G Chokkalingam, founder and managing director at Equinomics Research.