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Better FY22; pick-up in growth to drive valuation…

The banking sector has outperformed against the overall market (the Bank Nifty registered a fall of 1.6% whereas the Nifty fell 3.7% in the past three months) as the earnings outlook has improved due to exp

Challenges pertaining to the pandemic are behind us. Thus, we expect normalisation of business activities to be seen in credit offtake as well as collection efficiency ahead.

Taking over the baton from the previous quarter, bank credit growth has picked up pace, further led by the retail and MSME segments. The corporate segment is showing green shoots of revival as working capital limits are getting utilised. Bank credit growth is expected to pick up further as the impact of pandemic led disruptions recede, demand improves further, ECLGS scheme gets extended, etc. We believe NPAs have largely bottomed out with lower credit cost expected to aid earnings trajectory ahead.

Banking sector outlook:

* Overall non-food credit has grown 11.3% in April 2022, which is meaningfully up when compared to a trajectory of ~5.5% level seen during the beginning of FY22. As per latest sectoral deployment data, pick up in credit growth is largely driven by retail and MSME segment as they were up 14.7% and 35.1%, respectively, on a yearly basis. MSME segment has seen robust growth of over 30% in the past few months. This can be attributed to a pick-up in overall business activity and extension of ECLGS till March 2023. We believe bank credit growth will increase further as pandemic issues take a back seat  GNPA ratio for banks in our coverage declined in the range of 10-70 bps with average drop being at ~40 bps. PCR has inched up 150 bps QoQ to ~72%. Restructured book also declined by an average of 25 bps QoQ, thus indicating overall reduction in stress. We believe NPAs have largely bottomed out for banks with the trend expected to continue to remain positive ahead. Existing provision buffers, decline in stress and other resolutions are expected to keep credit cost benign

* Overall, this quarter saw healthy business momentum continuing with improvement in asset quality. HDFC Bank outperformed its comparable peers on the growth front while Kotak and IDFC First Bank also recorded a strong loan trajectory. Private banks have clearly outperformed their PSU counterparts, growing 15% YoY and 6% QoQ

* In an off-cycle policy meet, RBI increased its repo rate to 4.4%, with reverse repo rate unchanged at 3.35% and MSF at 4.65%. Also, in a recent media interview the RBI governor had hinted that there would be a rate hike in the coming months, thus indicating continuance in further hardening of rates

We prefer lenders with healthy CASA base, higher floating rate asset, adequate PCR and capital. Thus, we have a positive stance on Axis Bank, Bajaj Finance among large lenders and SBI Life, Star Health in the insurance coverage universe. We prefer SBI among PSU banks as bottoming of NPA and business growth would aid earnings trajectory and, thus, return ratios ahead. Continued competition from new age fintech players is expected to keep the performance of mid-sized banks volatile. Collaborative structure of neo banks could assist traditional banks to showcase and widen their offerings mostly towards untapped segment.

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