UBS has maintained a neutral stance on the banking sector, citing ongoing stress in microfinance and cautious optimism for leading banks. The brokerage highlighted key trends and provided its preferred picks within the sector.
Microfinance sector stress
- Microfinance PAR 0+ (overdues) rose by 110 basis points (bps) month-on-month (MoM) in November, reaching 18.6%. This marks an increase of 240 bps since September 2024 and 620 bps since March 2024.
- Higher slippages are expected in the second half of FY25 compared to the first half, reflecting continued stress.
- Collection efficiency, which was impacted by floods and festivals in October in some geographies, partially recovered in November.
- UBS believes stress may not peak in Q3FY25 as earlier anticipated by some management teams, indicating prolonged challenges in the microfinance segment.
Preferred bank picks
While UBS remains neutral on the overall sector, it highlighted HDFC Bank, ICICI Bank, and Federal Bank as its top picks due to strong fundamentals and robust growth prospects:
- HDFC Bank: UBS maintains a “buy” rating with a target price of ₹2,100.
- ICICI Bank: UBS reiterates a “buy” rating, setting a target price of ₹1,575.
- Federal Bank: The brokerage also maintains a “buy” rating on Federal Bank with a target price of ₹250.
UBS acknowledges the sector’s resilience but warns of near-term headwinds, especially in microfinance portfolios. The focus remains on banks with strong balance sheets and growth-oriented strategies.
Disclaimer:
This article is for informational purposes only and does not constitute financial advice. Please consult a qualified financial advisor before making investment decisions.
