ICICI Bank, SBI, Federal Bank Among Top Picks As RBI Flags Stress In Unsecured Credit: Nomura

Lenders with lower exposure to unsecured retail segments like ICICI Bank Ltd., State Bank of India and Federal Bank Ltd. are the top picks for Nomura Research after the central bank flagged stress in unsecured retail lending.

The Reserve Bank of India is concerned about higher unsecured lending write-offs among private sector banks, it said in the Financial Stability Report for December 2024.

"The gross non-performing assets ratio for unsecured lending was marginally higher at 1.7%," the report said. "An area of concern, however, is the sharp rise in write-offs, especially among private sector banks, which could be partly masking worsening asset quality in this segment and dilution in underwriting standards."

In that context, Nomura prefers banks with strong deposit franchises, strong retail underwriting and lower exposure to unsecured retail segments. ICICI Bank and State Bank of India are the top picks in the large-cap space and Federal Bank is the stock in the mid-cap segment.

So far in the current fiscal, 11% of the borrowers originating a personal loan under Rs 50,000 had an overdue personal loan and over 60% of them had availed more than three loans.

Nearly three-fifths of customers who have availed personal loans in the July–September period had more than three live loans at the time of origination, RBI report added.

The brokerage remains cautious on non-banking financial companies at least till the first half of the calendar year 2025, it said in another note. "We expect credit cost in fiscal 2025 to be higher than in fiscal 2024 which coupled with slowing growth and elevated cost of funds will put further pressure on return ratios."

Shriram Finance Ltd. continues to be their top pick in the sector while maintaining 'buy' on Aadhar Housing Finance Ltd., Five-Star Business Finance Ltd. and LIC Housing Finance.

Nomura is negative on SBI Cards and Payment Services Ltd., Mahindra & Mahindra Financial Services Ltd., Creditaccess Grameen Ltd., Cholamandalam Investment and Finance Co. and Bajaj Finance Ltd.