Shares of State Bank of India (SBI) and Axis Bank faced a decline following a rating downgrade by the brokerage firm UBS, which expressed concerns over the increasing trend of unsecured lending.
Around 1:15 pm, SBI’s shares were down 1.68%, trading at Rs 576.20 per share, while Axis Bank’s stock witnessed a 2.14% decline, reaching Rs 996.50.
UBS decided to lower its ratings for these banks, transitioning SBI from a ‘buy’ to a ‘sell’ status and reducing the target price to Rs 530, a significant reduction from the previous target of Rs 740. Similarly, for Axis Bank, UBS shifted its stance from ‘buy’ to ‘neutral’ and decreased the target price to Rs 1,100.
The primary reason behind these downgrades was the growing credit costs. UBS highlighted the increase in unsecured loans as a percentage of total loans, revealing figures of 11.1% for SBI and 10.7% for Axis Bank as of June 2023.
Additionally, UBS voiced concerns about the rising risk associated with unsecured retail loans, especially with increased lending to borrowers with overdue debt. This caution comes as unsecured lending, particularly through credit cards, has reached historic levels in India, prompting the Reserve Bank of India (RBI) to closely monitor certain segments of unsecured loans for signs of stress.
UBS’s report stated, “The share of loans to borrowers with weaker risk profiles has risen along with an increase in retail borrowers’ leverage.” RBI data confirmed the surge in outstanding credit card receipts for banks, which had grown to Rs 2.18 lakh crore as of August 25, up from Rs 1.68 lakh crore a year earlier. Similarly, outstanding personal loans had escalated by 26% during the same period.
UBS highlighted that the share of lending to borrowers with overdue loans had expanded to 23% in the 2022-23 fiscal year, up from 12% in 2018-19. Furthermore, the number of borrowers with multiple retail loans had increased to 9.3% in the previous fiscal year, compared to 3.9% in 2017-18.
In response to these concerns, UBS raised its credit cost estimates for domestic banks under its coverage by 5-10 basis points for the fiscal year ending in March.
The brokerage firm has adopted a “neutral” stance on the banking sector and anticipates a higher likelihood of regulatory measures being implemented to address issues related to unsecured loans.