Q1FY21 preview: Quarter of known unknowns and unknown knowns
Q1FY21 earnings for BFSI sector are going to be ambiguous and atypical – being the first quarter of full impact of the lockdown. Unprecedented trends would bring in earnings volatility via: 1) technically non-existential slippages due to moratorium; 2) continued contingency buffer build-up; 3) divergent business origination and collection trends through the quarter and across product verticals; 4) limited fee income opportunities; 5) extent of cost flexibility available initially; 6) aggressive MCLR as well as deposit rate cut. Modest credit growth (6% up YoY, down 2% QoQ), NIM compression and elevated credit costs will lead to low single-digit operating profit growth and >15% decline in PAT. Few subsegments witnessed encouraging progress, subsiding perceived near-to-medium risk towards worst case scenario panning out. Drawing comfort from improved visibility towards base case and lower than anticipated earnings volatility, we up our target multiples leading to revised target prices (table 2).
Q1FY21 – A quarter of known unknowns and unknown knowns
* Continued build-up of contingency buffer: We know that financiers would continue building-up their contingency buffers this quarter as well to strengthen their balance sheet amidst uncertainty, thereby keeping credit costs elevated. However, in absence of fresh slippages (due to moratorium), provisioning will vary depending on buffer created till now, collection trends across product segments, stress-test under evolving scenarios etc. While most managements refrained from giving a guidance on likely stress build-up, some clarification on this front would help.
* Behaviour under Morat 2.0: Undoubtedly, borrowers seeking Morat 2.0 will be lower given resumption of activities and focus on collections. However, what is unknown is: can the improving trend be extrapolated, where would it settle by August and what will be the probability of default post moratorium? Amongst categories, we expect Morat to be higher for SMEs, CVs, wholesale real estate, cab aggregators etc.
* Cost rationalisation a top priority: The lever available with financiers to manage operating earnings is on the cost optimisation front in Q1FY21E, which would reflect respective financiers’ flexibility in rationalising costs.
* Growth in advances to moderate; deposits continue traction: Q1FY21 will be an unusual quarter with disbursement and collection trends being divergent across players and product segments due to lockdown-driven dislocation and moratorium. We expect credit growth at 6-8% YoY (flat to marginal decline QoQ). Corporate and SME lending (under ECLGS) should provide support while credit card and new CV segments will see maximum moderation. Amongst players, we expect HDFC Bank, Kotak Mahindra, SBI, and CUBK among others to fare better. NIMs to decline: MCLR cut (40-80bps across players), incremental lending towards low-yielding assets, and moderation in C/D ratio will more than offset the benefit of deposit rate cut and lower slippages, thereby leading to QoQ decline in NIMs.
Is there a need to revisit our approach and preferences?
We stick to our approach of favouring franchises having near-term resilience as well as medium-to-long term sustainability /scalability based on our SAAP framework. However, we are increasing our target multiples and target prices as many product segments have showed encouraging progress and perceived near-to-medium risk towards worst case scenario panning out has subsided. Nonetheless, our top preferences remain: HDFC Bank, Kotak Mahindra, Axis Bank, AU SFB, and Cholamandalam among others.
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