Published on 4/07/2020 10:48:51 AM | Source: Emkay Global Financial Services Ltd

Banking Sector Update - Higher NPA/ Covid provisions hurt Q4, amid looming asset quality risks by Emkay Global

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

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* Healthy PPoP, but Covid-19 provisions hurt earnings, pushing some banks into loss: Systemic credit growth in Q4 remained subdued at 6%. For banks under our coverage, it was 7%, with moderation seen in retail private banks, including Kotak, ICICI, AU SFB, RBL and IndusInd, due to the lockdown in fag end of March. Though overall deposit growth has been healthy, deposit movement among banks was a key monitorable during Q4 after the Yes Bank saga, with HDFCB, Kotak and SBI being key beneficiaries mainly on the CASA front, while IndusInd, RBL and Yes Bank on the losing side. Despite subdued credit growth and lower LDR, margin performance was better than expected, aided by lower CoF and lower interest reversal on NPAs, which coupled with healthy treasury gains led to healthy PPoP across banks. However, most banks made higher NPA provisions to improve PCR and also on account of Covid-19, resulting in lower earnings or even losses (Axis, Yes, Canara, PNB, Union and Indian). Barring HDFCB and BOB, other banks under our coverage reported subdued Q4.

* NPAs moderate for banks due to moratorium; restructuring awaited: The overall NPA formation moderated in Q4 and GNPA ratio declined, mainly due to the loan moratorium even on overdue (but not NPA) loans and absence of lumpy corporate NPAs. However, the key monitorable during Q4 was the moratorium rate and Covid-19-related contingent provisions. Larger banks reported a moratorium rate between 25% and 35%, while SME, VF or MFI heavy private banks reported moratorium to the north of 50% in the first round (till May 20). PSBs like BOB and IDBI reported higher (>40%) moratorium rates (including non-payment of even 1-2 EMIs) due to the opt-out option. PSBs that reported lower moratorium rates, including SBI, may not be strictly comparable due to the difference in classification of loans under the moratorium and the date of reporting. On the provisioning front, few large banks like Axis (53bps)/ICICI (42bps) and MFI/VF heavy banks like Bandhan (96bps), AU SFB (51bps), Equitas (65bps) and Ujjivan (49bps) made higher Covid-19-related contingent provisions. Some banks (including PSBs and IndusInd) chose to keep their heads just above regulatory requirements. Though moratorium rates in the second round are coming-off largely on expected lines, we believe that one-time restructuring will be required for SME and select corporate sectors once the second moratorium is over to limit asset quality damage after Q2FY21.

* Liquidity improving, but NBFCs bracing for asset quality fall-out: The overall liquidity scenario has improved for NBFCs post RBI intervention, while NBFCs are opting for expensive long-term funds (including from banks) to shore-up liquidity buffers even at the cost of margins. Overall AUM growth for NBFCs under our coverage has been weakest in the past twelve quarters at 9.4% yoy as fresh disbursements fell sharply, impacted by weak macros, liquidity constraints and the lockdown in late March. Overall PAT declined sharply by 37% yoy, due to subdued margins and elevated credit costs in the wake of Covid-19 provisions.

* Slower growth, investment markdowns hurt Insurance cos in Q4: Overall premium/APE growth for the insurance industry was hit in Q4 due to the lockdowns and a moratorium of 90 days over insurance payments for the tax benefit purpose. Solvency ratios declined sharply due to hit in the investment book and write-off of Yes Bank’s AT-1 bonds for some. On a full-year basis, VNB margins have seen improvement, mainly due to a change in the product mix during FY20, while 13M persistency ratios too have improved. We believe that Covid-19 may turn out to be a trigger for protection plans, pushing margin profiles higher for most insurance players.

* Stay put with high-quality names: After the recent up-move in stocks, we prefer to remain cautious amid continued disruption leading to subdued growth and elevated asset quality risk post Q2FY21. Clamor for one-time restructuring is on the rise, mainly for stressed SME and select corporate sectors, but it may only defer the NPA pain, while any higher provisioning requirement (>5%) may still hurt the earnings. Our preferred picks among banks are ICICI and HDFCB, followed by SBI in PSBs, given their better shock absorption capacity. Within the NBFC space, we prefer HDFCL, CIFC and SHTF. In the insurance space, we are OW on SBIL, HDFCSL and UW on MAXL and IPRU in our sector EAP. However, given the sharp run-up recently, valuations are not cheap, limiting upside potential.


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