Published on 13/08/2022 12:18:59 PM | Source: Emkay Global Financial Services Ltd

Banking Sector Update - Accelerating growth, improving asset quality bode well for banks By Emkay Global

Posted in Broking Firm Views - Sector Report| #Emkay Global Financial Services Ltd. #Sector Report #BFSI

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* Positive surprise on growth, but higher opex, investment MTM hurt PPoP in 1Q:

Most banks reported strong credit growth in 1Q, led by healthy traction in retail and even corporate book for some PSBs. However, margin performance was mix, barring Axis Bank and Kotak Bank, which surprised positively on the margin front. Opex turned out to be higher than our expectations due to elevated business expenses, staff increments/incentives, and investment in branches/tech, which kept core profitability in check. Amid the sharp increase in G-sec yields, treasury performance was mix with midsize banks such as Federal, IIB, and BOB surprisingly positively, while large banks including SBI, HDFC Bank, Kotak, and Axis Bank reported higher losses. That said, loan loss provisions continued to recede due to better recoveries and healthy provision buffers, supporting profitability. Among private banks (PVBs), ICICI Bank was again a clear outlier, while Axis Bank reported a healthy earnings beat due to better NIM/lower LLP. HDFC Bank delivered strong growth, but core profitability remains sub-par. Among small/mid-size banks, IIB, Federal Bank, KVB, and Ujjivan reported healthy beat on earnings. Bandhan continued to reel with asset-quality issues. Among PSBs, BOB surprised positively on growth/earnings, but SBI was hurt by massive MTM losses on investments


* Managing growth, margins to be key focus areas for banks amid rising rates and cost pressures: Overall systemic credit growth continues to remain strong at 14% yoy, partly helped by lower base and partly by strong growth in retail/corporate book. Most banks have raised their growth guidance for FY23, factoring strong Q1 and improving growth impulses in iretail, SME, and corporate portfolio. Within retail, mortgage growth remains healthy, while signs of pick-up are visible in otherwise lackluster vehicle finance as well. Unsecured loan growth remains strong, led by cards and PL, given underlying strong demand and banks turning pro-risk, given improving asset quality. That said, funding as well as operational cost pressures are on a rise and, thus, banks with the ability to pass on rate hikes/floating rate book and drive-up fees should be able to protect their core profitability. We believe ICICI/SBI are far better placed with higher share of retail book, including mortgages to improve their margins, while SBI could additionally benefit on retirement liability due to absence of family pension provisions unlike last year


* Headline asset quality improving, but need to monitor SME/restructured pool amid rising macro disruptions: Gross slippages were slightly higher than expectations due to agri stress in select banks (HDFC Bank and ICICI Bank) and stress flow from restructured pool as moratorium ends. However, there are no visible signs of stress in the retail portfolio, while recovery trends are improving. Within MFI too – collection efficiencies are improving across the players, but for Bandhan and RBL. That said, we believe macro disruptions could have some impact on SME/SBL and CV portfolio, which needs to be closely monitored. For PSBs, the long pending NARCL transfer is likely to begin soon. We expect overall NPA ratios to trend down, led by receding stress pools and better credit growth trajectory, which coupled with healthy provision buffers across banks should further decelerate loan loss provisions and, thus, support profitability


* Sustaining growth momentum, improving core profitability will be key to drive-up valuations: Most banking stocks have rallied around Q1 results, but we believe sustaining credit growth momentum and delivery on core profitability will be the key to drive-up the otherwise reasonable valuations for banks. Most banks under our coverage have given guidance for better growth trajectory. The festive season is expected to be reasonably strong for retail lending, which coupled with asset re-pricing should support margins/coreprofitability. Among private banks, ICICI Bank remains our top pick, given its continued outperformance on growth/core profitability. Notwithstanding, higher MTM hit on investments depressing profits, SBI also delivered on growth/core-profitability. This coupled with reasonable valuations (1x its FY24 ABV) and support from subsidiaries makes it an attractive Buy from a long-term perspective among PSBs. For HDFC Bank, clarity on the merger structure will be the key for re-rating. IIB looks attractive in the midcap space, given lower valuations and improving prospects of better growth/RoE trajectory. That said, concerns around current MD term extension beyond March 2023 will be closely monitored by investors. We upgrade Ujjivan to Hold from Sell due to strong delivery on growth/profitability, but remain concerned on its otherwise sub-par liability profile and MFI-dominated loan portfolio. Among small/mid-size banks, we prefer CUBK, KVB, and Federal Bank


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