Credit Suisse downgrades Kotak Bank, IndusInd Bank to 'underperform'

MUMBAI: Credit Suisse has downgraded Kotak Bank and IndusInd Bank to 'underperform' from 'neutral' after the Reserve Bank of India announced a reversal in easy monetary stance to stop the rupee depreciation.

In a surprise move, the RBI announced a 200 bps hike in bank rate to 10.25 per cent, taking out Rs 120 billion of liquidity through OMOs. It has capped banks' borrowing under the LAF (repo window at 7.25 per cent) to Rs 750 billion.

For any incremental liquidity, banks will have to source funding at the now elevated bank rate of 10.25 per cent.

According to Credit Suisse wholesale-funded entities such as Yes Bank, Kotak Bank, Bank Of India, Canara Bank, NBFCs and banks with high LDRs and those with ALM mismatches will be the worst impacted with these moves, as they will be forced to curb asset growth in addition to facing margin pressures.

"Indian banks' valuations till now were primarily determined by asset side comfort. With the liability part of the balance sheet also coming into focus, we see downside to stocks of wholesale funded retail lenders like Kotak (95 per cent LDR) and IndusInd (82 per cent) trading at ~3x book, and we downgrade these two to Underperform from Neutral," the report said

"The biggest risk from this set of measures would be if the lack of liquidity precipitates the corporate asset quality problems. As liquidity becomes scarce, some of these assets may turn to NPLs on books quicker than expected earlier. We maintain our Underweight stance on the Indian banks sector," the report added.

The brokerage has lowered Kotak Bank's price target to Rs 618 from Rs 680 and IndusInd Bank's target price has been lowered to Rs 416 from Rs 465.