SVB test on Indian banks: Sector holds up, again, says Jefferies

The Indian banking sector has been in focus on the back of a massive fall in US lenders due to the emergence of a liquidity crisis in the US-based Silicon Valley Bank (SVB).

On March 9, 2023, the four biggest USA banks lost nearly $52 billion in market value. The main culprit behind this massive crash in banking stocks was the 60 percent fall in the shares of Silicon Valley Bank (SVB) parent SVB Financial Group. This came after SVB announced the sale of its $21 billion AFS bond portfolio for a big loss of $1.8 billion. The bank further plans to sell $2.3 billion worth of shares to shore up its liquidity, the lender stated in a press release. The selling of its bonds in losses indicates a major liquidity crisis in the lender, noted experts.

Against the backdrop of SVB, Jefferies did a test on Indian banks on the quality of their deposits and the impact of mark-to-market (MTM) loss on the held-to-maturity (HTM) book.

Testing the ability of Indian banks to withstand losses on their HTM book amid rising bond yields, Jefferies observed that the impact of MTM loss on the HTM portfolio is 6 percent of net worth for private banks and 15 percent for state-owned banks, which is far lesser than what SVB has suffered. Indian banks are well placed, it said.

“On funding, more than 60 percent of deposits come from households. Savings deposits are stickier (duration three to five years), and people don’t move to G-secs quickly. On assets, loans are 65 percent of assets and 25 percent of investments. HTM is allowed on G-secs and forms 80 percent of that and 15 percent of assets. Indian banks are well placed,” said Jefferies in a note.

On average, the brokerage noted that G-secs form 18 percent of total assets for private banks and 22 percent for public sector banks.

The HTM investments of the banks were ₹20.11 lakh crore, informed Jefferies. Of the 8 banks under its coverage, Punjab National Bank held the largest amount of government bonds under HTM at 91 percent while Kotak Mahindra Bank held the lowest at 45 percent. All other lenders held 72-78 percent of their government bonds in HTM.

The total investment book of these lenders was ₹33.48 lakh crore at an aggregate level, further informed the brokerage.

Further, Jefferies' analysis revealed that Indian banks have a much greater dependence on term and savings deposits even as retail deposits formed 55-60 percent of total deposits for private banks while the share was pegged at 67 percent for government-owned banks.

Interestingly, Jefferies has a ‘buy’ rating on 7 of the 8 banks in its coverage including ICICI Bank, Axis Bank, Kotak Mahindra Bank, IndusInd Bank, Bandhan Bank and State Bank of India. However, it has a ‘neutral’ call on PNB.

Earlier this week, on the back of the SVB crisis, global brokerage Macquarie also noted that Indian banks are 'goldilocks with a minor bump'.

According to Macquarie, low credit costs continue to drive multi-year high ROAs (return on assets). Further, EPS (earnings per share) upgrade cycle continues and the brokerage has also raised EPS by 3-9 percent for FY23E-25E. "We increase target prices across most banks as we roll forward to FY25E valuations," it said in the note.

However, Jefferies cautioned that the fate of European lender Credit Suisse Group AG is of greater importance to the Indian banking sector than the collapse of Silicon Valley Bank.

"Given the relevance of Credit Suisse to India's banking sector, we see softer adjustments in assessment of counter-party risks, especially in the derivative market," it said.