SBI Card, HDFC Bank, RBL Bank, Kotak Bank shares: How RBI's raising of risk weights may hit stocks

With the RBI increasing risk weights on unsecured retail loans including consumer durables and credit cards by 25 basis points for both banks and NBFCs and also for bank lending to NBFCs, a host of stocks could take a hit. Nuvama Institutional Equities said the move could have a negative impact on the entire sector, as it takes away the growth multiple and would increase cost of funds (CoF) for NBFCs.

Its channel checks and the RBI’s FSR suggested that the non-SBI PSU banks have high non-performing loans (NPLs) on unsecured loans even with small exposures.

"While all lead lenders will correct, we particularly call out SBI Card, Axis Bank (lower capital), state-owned banks, ABFRL, RBL Bank Ltd, and Kotak Mahindra Bank Ltd as they would lose growth or have low capital. Lenders that are least affected are IndusInd Bank, LIC Housing Finance and City Union due to their immaterial exposures," the brokerage said.

Motilal Oswal Securities said lenders could increase interest rates to offset the impact on profitability. The cost of borrowings for NBFCs will also go up as banks look to increase lending rates while higher risk weight leads to higher capital consumption, it said.

Bank shares hit hard

Nuvama said banks relatively low on capital or with high exposures are more impacted. It said RBI’s FSR imply state-owned banks other than SBI have high NPLs on unsecured loans.

While their unsecured exposures are small, if high NPLs continue they could remove 15-20 basis points of recently improved return on asset (RoA). It believes the most impacted banks are Axis Bank Ltd (rapid growth in unsecured, high share of NBFC, relatively low capital), State Bank of India Ltd (low capital though NPLs in control in unsecured loans), Kotak Mahindra Bank Ltd (high CAR but large portion of incremental growth driven by unsecured), RBL Bank (high credit cards’ share), Bank of Baroda Ltd (BoB) (high NBFC loans’ share) and non-SBI PSU banks with high personal loan NPLs  and high NBFC exposure," it said.

Other banks will also be impacted but to a lower extent. For example, ICICI Bank has a high share of incremental loans from unsecured while HDFC Bank’s outstanding share is high though incrementally growth in unsecured has slowed in the last two quarters. Federal Bank is also seeing strong growth in this segment. IndusInd is relatively safer, Nuvama said.

"Our estimates suggest a 30-85bp impact on capital ratios (barring SBI Card) on account of the increase in risk weight (please see Exhibit 7 for details). Our calculations suggest the impact to be maximum for RBL/HDFCB/ICICI at 84bp/72bp/64bp, while SBIC remains the most vulnerable with a 416bp impact," Motilal Oswal said.

NBFC stocks in focus

Nuvama said it believes the cost of funds for the entire NBFC sector will also rise. NBFCs that are more impacted than others include SBI Card due to capital, Bajaj Finance on higher exposure to credit cards and consumer durables and AB Capital, Poonawalla Fincorp Ltd, Cholamandalam Investment and Finance Co Ltd due to high growth.

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