SBI, Axis Bank Downgraded As UBS Sees Higher Credit Losses On Unsecured Loans

Indian banks' credit losses are likely to rise by 50–200 basis points due to increasing risks of defaults on retail unsecured loans, according to UBS.

The brokerage raised its forecasts on credit costs to beyond 20 basis points by the financial year 2025. It also downgraded the State Bank of India to 'sell' and Axis Bank Ltd. to 'neutral'. As of June, unsecured retail loans accounted for 8–12% of banks' loan books, UBS said.

"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.

UBS forecast underscores concerns raised by Reserve Bank of India Governor Shaktikanta Das in the latest monetary policy meeting about "very high growth" in unsecured personal loans. The central bank advised banks and non-banking financial companies to strengthen their internal surveillance mechanisms and address any buildup of risks.

State-owned banks and NBFCs are more likely to default on personal loan portfolios than private banks, as they cater to a larger portion of borrowers with weak credit profiles. While the market share of state-owned banks stood at 39% as of June of personal loans above Rs 10 lakh, NBFCs have cornered about 74% of small-ticket personal loans below Rs 50,000.

UBS justified its downgrade of SBI from 'buy' to 'sell' due to a 10-basis-point increase in credit costs, a fall in earnings per share of 5%, and the lender's low capital buffer. Similarly, the brokerage firm revised Axis Bank to 'neutral' from 'buy' and slashed its price target to Rs 1,100.

"We believe the probability of regulators increasing the risk weight for PL is rising, and a 25% hike could lead to a 7–40bp drop in the CET-1 ratios of the banks we cover," UBS said.