Caution to prevail; Earnings to remain muted
Trend across moratorium book/collection efficiency remains key
* Banking sector earnings are likely to remain muted affected by the COVID-19 outbreak and its resultant impact on growth/asset quality. While the moratorium/standstill benefits continue, we expect banks to further strengthen their balance sheets by making healthy provisions. Moreover, declining interest rates along with higher liquidity on the balance sheets should keep margins under pressure (~10-20bp for Private Banks). We believe the proportion of loans under moratorium would decline gradually. Thus, collection efficiency trend is an important near-term metric to assess the banking system’s health. Overall, we estimate our banking coverage universe to deliver 20%/4% growth in 1QFY21 PPoP/PAT.
* Private Banks – prudential provisioning will continue to weigh on earnings: We estimate Private Banks to report PPoP growth of ~21% YoY (+7% QoQ), while PAT should grow 4% YoY (+47% QoQ). The elevated credit cost coupled with suppressed credit growth is likely to put pressure on near-term earnings. However, this may get partly offset by higher treasury income led by decline in G-Sec yields and stake sale in subs for ICICIBC (INR30.5b) and SBIN (INR15b).
* Loan growth in retail should moderate due to the COVID-19 outbreak as discretionary consumer spending declines along with muted wholesale lending trends. For FY21/FY22E, we expect Private Bank’s overall loan growth to decline to 11%/15%, reflecting the slowdown in systemic loan growth. We estimate AXSB/ICICIBC to deliver 15.4%/10.9% YoY loan growth, while HDFCB should report higher growth of ~21% YoY. KMB/IIB should exhibit moderation in loan growth to 6.6%/3.5% YoY.
* Margin trajectory is likely to decline affected by the sharp cut in repo rate/MCLR across banks. Softening loan growth and higher liquidity on the balance sheet should put further pressure on margins (~10-20bp). We, thus, expect Private Banks to deliver NII growth of 14% YoY, led by KMB (18% YoY), RBK (18% YoY) and HDFCB (16%YoY).
* Asset quality trends are likely to stay suppressed as the full quarter was under moratorium. Thus, focus would remain on the proportion of book under moratorium and trends in collection efficiency. The bulk of the impact is likely to be witnessed over 2HFY21. We expect large banks like HDFCB, ICICIBC and KMB to navigate through the current crisis relatively well; however, we remain watchful of other banks like AXSB, IIB and RBL given their high rating downgrades and slowing macros.
* PSBs’ earnings to remain under pressure: We estimate weakness in the earnings of PSU Banks (PSBs). Besides the dreadful impact of COVID-19, sluggish loan growth due to merger integration, higher proportion of moratorium and delay in the resolution of NCLT accounts are additional earning dampeners. PSBs are expected to deliver NII growth of 5% YoY and a PAT growth of ~3% YoY to INR31.2b. We expect PSBs’ PPoP to grow ~19% YoY.
* Mid-sized Private Banks – to tackle asset quality challenges: We expect performance of mid-sized Private Banks to remain under pressure as they face challenges on the asset quality front; however, collection efficiency is showing improving trends. We estimate DCB to report decline of 26% YoY in net earnings while RBK’s earnings should be impacted by higher credit cost. Thus, RBK’s PAT is expected to decline 54% YoY though PPoP growth may remain strong at 15% YoY. FB is best placed on liability franchise; however, it is likely to report an earnings decline of ~21% YoY as we factor in the higher credit cost.
* Small Finance Banks – earnings to get impacted on higher provisions: We expect AUBANK to report PPoP growth of 10% YoY, led by loan growth of 18% YoY. Earnings should decline 25% YoY led by higher credit cost. EQUITAS is expected to report PPoP growth of 29% YoY with earnings decline of 44% YoY.
* Life Insurers to witness decline in premiums: IPRU/HDFC Life is estimated to report net premium income decline of 18%/15% YoY, impacted by weak business trends owing to the COVID-19 outbreak. With continued focus on protection business and slowdown in low-margin ULIPs, margin trajectory should improve for these players. Overall, we expect PAT decline of 21-22% for both the insurers.
* Other monitorables:
* Moratorium 2.0/Collection efficiency – Management commentary on the moratorium trends under moratorium 2.0 would be the key theme of discussion. Also, the trends in collection efficiency (banks have highlighted improving collection trends over May-Jun’20) as the economy starts to recover would be an important metric to assess the banking system’s health in the near term.
* Asset quality – Guidance on asset quality ratios and credit cost for FY21 are important monitorables as the system traverses the negative impact of COVID-19. While recovery has started it is at a slow pace.
* Liquidity management/Deposit build-up – Liquidity being maintained by banks would be a key metric amongst investors. This is especially important considering the RBI's moratorium, which could lead to ALM mismatch – as liabilities would have to be honored while collection would be impacted.
* Margin trajectory – Declining rate environment along with higher liquidity is likely to keep margins under pressure. However, reduction in cost of funds as banks have lowered their interest rate would ease off some pressure. Hence, overall trajectory would be an important monitorable.
* Treasury performance – Treasury performance during the quarter is another vital metric as bond-yields have moderated. Also, few banks – ICICIBC (INR30.5b) and SBIN (INR15b) – sold some stake in subs to raise capital.
* Capitalization levels – As banks would look to absorb the incremental stress due to COVID-19, we believe the CET-ratio could fall significantly, requiring them to raise further growth capital in the near term. Thus, most banks have taken their boards’ approval and would raise capital over FY21.
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