Financial services sector to witness sharp spike in Non-performing assets – Kotak Bank

Update on the Indian Equity Market:

Markets failed to keep the initial gains as Nifty closed the day 0.1% higher at 10,618. IT sector led the index higher with WIPRO (+16.9%), INFY (+6.5%) and HCL (+5.7%) while the losing stocks for the day RELIANCE (-3.9%), BHARTIARTL (-3.6%) and ZEEL (-2.9%). Among the sectors, IT (5.2%), FMCG (0.7%) and PHARMA (0.6%) while REALTY (-2.1%), MEDIA (-1.7%) and PSU BANK (-1.4%) were the laggards.

Edited excerpts of an interview with Mr Uday Kotak, Managing Director, Kotak Bank Ltd. (Kotak); dated 14th July 2020 from CNBC TV-18:

• The banks would need to be capitalized to the extent of Rs 2-3 lakh crore. The recent fund raising spree by banks was a step in this direction.
• The banking sector’s total loan book is about Rs 100 lakh crore. The loan losses to the extent of 4-5 percent of total loans could turn Non-Performing Loans (NPL) due to COVID-19. Against this spike in NPL, he believes that the financial sector will need recapitalization of 2-3 percent of the loan book.
• The financial sector is going all out to beef-up the reserves to be able to absorb the shocks coming out of the crisis. The key lesson for lenders from the crisis is to tighten their lending practices and make loans after taking risks into account.
• Commenting on the recent surge in the stock market, he said that the market is ignoring short term issues and valuations are based on future recovery. Lower interest rates and disproportionate liquidity globally and locally are helping the equity market as savers have few avenues to invest in.
• He also mentioned sectors like airlines, tourism, entertainment, hotels and restaurants had been disproportionately affected due to the issues faced by these industries.
• He said that if the job situation worsens, unsecured customers will add risk. He will be closely watching for recovery in the most affected sectors and job stability very closely.

Consensus Estimate: (Source: market screener, investing website)

• The closing price of Kotak Bank was ₹ 1,289/- as of 15-July-2020. It traded at 3.3x/ 2.9x/ 2.7x the consensus BV estimate of ₹ 393/ 442/ 472 for FY21E/ FY22E/ FY23E respectively.
• The consensus target price of ₹ 1,382/- implies a PB multiple of 2.9x on FY23E BV of ₹ 472/-.

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