Q1FY21 private bank earnings – Known unknowns addressed; unknown knowns linger
Our stance articulated in Q1FY21 preview of earnings being a typical was vindicated from the reported earnings for the quarter. Unprecedented trends characterised the quarter: 1) contingency buffer augmented (similar to Q4FY20, below our liking); 2) accelerated NPL recognition (for few) amidst technically zero slippages; 3) Morat 2.0 – the magic number 9 (at lower end) and sub-15% (average) – showed sharp improvement led by corporates, few pockets of retail (MFI, unsecured, etc.); 4) sharp contraction in fee income; and 5) enough cost flexibility linked to business volumes. However, stability in NIMs (for many), treasury gains and cost flexibility (variable led) took us by surprise. Core operating profit grew 5% YoY (-2% QoQ) and elevated credit cost led to >15% decline in PAT. We believe more visibility on growth, cost agility and credit cost will emerge only in H2FY21 and will also determine respective player flexibility and strength of balance sheet – right now it is mere hope and belief. Top preferences remain: HDFC Bank, Kotak Mahindra, Axis Bank.
* Contingency buffer – similar magnitude as in Q1FY21 (lower than our liking): Banks further strengthened balance sheet by augmenting contingency buffer (cumulative buffer averaged at 60-70bps across banks) and enhancing coverage (chart 2 and table 2, 12,13). However, similar magnitude as in Q1FY21 is lower than our liking, especially against the backdrop of perceived macro uncertainty. Bandhan (>200bps) and AU SFB have built higher buffer while HDFC, Federal at lower end One hypothesis is that improving collections give enough confidence about its adequacy; or spill the provisioning over coming quarter till visibility emerges. We put our figure on it later and are building-in higher credit cost across banks.
* Morat 2.0 – the magic number 9 (at lower end): Undoubtedly, Morat 2.0 was anticipated to be lower given activity resumption and focused collections (chart 1). However, settling at ~9% (for HDFCB, Kotak, Axis) and sub-15% (Indusind, RBL) is encouraging given that bankers followed only opt-in approach and approved only after effective viability review (table 1). What is still unknown is the estimable probability of default from moratorium book and collection efficiency amongst non-moratorium customers. Amongst categories, corporate proportion seemed to have declined sharply, with improved recovery trends in MFI, credit card, agri, etc. Moratorium stays higher for SMEs, CVs, real estate, cab aggregators, etc.
* Cost agility reflected – more linked to business volumes: Operating expenses contracted 15-20% QoQ on an average (table 8, 9, 10) – primarily led by lower volumes and cost curtailment (discretionary spends, negotiating rentals, etc). However, management suggested it is below normal and should rise as activity resumes.
* NIMs to decline: MCLR cut (40-80bps), moderation in C/D ratio and surplus liquidity were expected to drag NIMs. However, mix change (in favour of retail) and lower deposit cost offset the drag for a few banks and NIMs were surprisingly stable (table 5).
* Bankers treading cautiously on growth; deposit steady accretion: The narrative across bankers was stability, quality and surplus liquidity over growth in the interim. Credit growth moderated to 6-8% YoY (down 2-3% QoQ) due to lockdown-related disruption. Working capital cycle elongation is natural for corporates and SMEs though bankers have been prudent in lending to better rated borrowers at present. Retail segments moderated a tad, but were relatively stable. HDFC Bank, Bandhan Bank were an outlier seeking growth while for others caution preceded opportunity (if any). On the other hand, deposit flow were steady (that too more granular) and CD ratio contracted.
No change in approach; realigning preferences a bit
Covid disruption has stretched beyond expectations in many metros though revival in a few pockets has been encouraging. Extrapolating similar incremental delta witnessed over past two months would be far-stretched. Players are preparing for resilience and sustainability and those with strong franchise, sufficient capital buffer and proven risk-management would come out stronger than peers. Top preferences remain: HDFC Bank, Kotak Mahindra, Axis Bank. We have downgraded AU SFB and upgraded SBI a notch on valuation argument.
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