On Friday 13 October UBS downgraded state bank of India for the first time and cut the target price significantly from Rs. 740 to Rs. 530, Moreover, UBS also downgraded Axis banks’ rating to “neutral”.
After this news shares of state bank of India and axis bank have corrected up to 2.34 percent, currently shares of state bank of india are trading at Rs. 575 per share, down by 1.75 percent from its opening price. Shares of Axis bank are trading at Rs. 994.25 down by 2.37 percent from its opening price.
The reason for downgrading of the banks according to UBS is, credit costs for the banks may increase beyond 20 basis points by the financial year 2025 because of increasing default rates on retail unsecured loans.
“We believe the risk of defaults is rising, as the share of lending to already overdue borrowers (1+ days past due) rose from 12% in FY19 to 23% in FY23,” the brokerage firm said in a report.
A recent UBS forecast highlights the apprehensions expressed by Shaktikanta Das, the Governor of the Reserve Bank of India, during the latest monetary policy meeting regarding the significant growth in unsecured personal loans.
Public sector banks and non-banking financial companies (NBFCs) are at a higher risk of defaulting on their personal loan portfolios compared to private banks. This is primarily due to their larger exposure to borrowers with weak credit profiles.
As of June, state-owned banks held a 39% market share for personal loans exceeding Rs 10 lakh, while NBFCs dominated the market with approximately 74% of personal loans below Rs 50,000.
Written by: Vinit Israni
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