Both HDFC Bank and Kotak Mahindra Bank are expected to have minimal impact on their Tier-1 capital levels following the Reserve Bank of India’s (RBI) increase in risk weights for unsecured consumer loans. Analysts believe that the two banks have sufficient capital levels and inexpensive valuations to weather the new regulations without the need to raise additional capital.
Dnyanada Vaidya, Senior Research Analyst at Axis Securities, stated that the impact of the new risk-weight norms is estimated to be between 55 to 90 basis points on their CET-1 capital adequacy ratio. Gaurav Jani, Research Analyst at Prabhudas Lilladher, agreed that HDFC Bank and Kotak Mahindra Bank will be able to navigate through the challenges due to their adequate capital levels.
What sets HDFC Bank and Kotak Mahindra Bank apart from their peers is their exposure to unsecured consumer loans. According to a Jefferies report, HDFC Bank’s exposure stands at 8% of its total loan book, while Kotak Mahindra Bank’s exposure is the lowest at 5%. This indicates that the impact of the new risk-weight norms will be relatively lower for these banks compared to others.
Investors need not be overly concerned about the impact of the new regulations on HDFC Bank and Kotak Mahindra Bank. As per Kaitav Shah, lead BFSI analyst at Anand Rathi Institutional Equities, the knee-jerk reaction in the stock prices of banking names is temporary, and investor sentiment is likely to improve over the medium term.
In terms of valuation, both HDFC Bank and Kotak Mahindra Bank offer attractive opportunities for investors. HDFC Bank is trading at a price-to-earnings (PE) ratio of 20x, lower than the sector’s PE mean of 24x. Kotak Mahindra Bank is also inexpensive with a 20x PE ratio.
Investors are advised to consider the long-term potential of HDFC Bank and maintain a ‘hold’ rating, while Kotak Mahindra Bank is recommended as a ‘buy’ with a target price of Rs 2,095 per share.
Disclaimer: The views and investment tips expressed in this article are the opinions of the author and do not constitute financial advice. Please consult with a certified expert before making any investment decisions.