08-10-2021 12:55 PM | Source: Motilal Oswal Financial Services Ltd
Financials: Banks and Insurance - Quarter of consolidation, with an eye on earnings recovery By Motilal Oswal
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Quarter of consolidation, with an eye on earnings recovery

Credit cost to stay elevated on potential second COVID wave impact

* 1QFY22 to be a quarter of consolidation: The momentum in recovery gained over 4QFY21 was impacted by the second COVID wave, with the asset quality outlook deteriorating once again. Business activity was impacted by the second COVID wave over Apr–May’21, and localized lockdowns were seen across most states. As a result, systemic growth moderated to 5.8% as of 18th Jun’21 (1% decline over FY22YTD).

While economic activity has started to pick up since Jun’21, we expect business growth to remain modest over 1QFY22 and estimate systemic loan growth of 9%/13% for FY22E/FY23E. Nevertheless, we estimate our Banking Coverage Universe to deliver ~6%/41% PPOP/PAT growth in 1QFY22E (on a low base).

* GNPL ratios to see uptick; restructuring book to increase further: The second COVID wave, coupled with localized lockdowns, is likely to impact the asset quality performances of banks. Many banks indicated a drop in collection efficiency over Apr–May’21, while check bounce rates posted an uptick. We estimate slippage to remain high over 1HFY22, especially in 1QFY22, resulting in an uptick in GNPL ratios. However, we estimate the impact to be much lower v/s the first lockdown. Restructuring 2.0 could also be higher, led by the Retail/SME segment (as it was severely impacted), while the Corporate segment is likely to remain resilient.

* While many banks have a high PCR and carry additional provision buffers, banks would be cautious about drawing down on these buffers given the uncertainty and fear around a third wave. Nonetheless, we estimate credit cost to remain high over 1HFY22.

* Private Banks – PPoP growth modest; provisions to stay elevated: We estimate private banks to report PPoP growth of ~6% YoY (-1% QoQ) and PAT growth of ~30% YoY (-7% QoQ), supported by the low base of 1QFY21. Earnings are likely to be impacted by high credit cost and likely moderation in business growth / fee income, while they would be offset by lower opex.

* Loan growth is likely to moderate, impacted by localized lockdowns; however, the momentum over Jun’21 and commentary around the growth outlook for FY22 would be key monitorables. Growth in working capital requirements in the Corporate segment would be another monitorable. We expect private bank loans to grow 14%/17% over FY22E/FY23E; we estimate AXSB/ICICIBC to deliver 13%/18% YoY loan growth over 1QFY22E. HDFCB posted growth of ~14% YoY (+1.3% QoQ), and FB/IIB reported growth of ~8%/7% (0.7–1.6% decline QoQ). RBK reported growth of 2% YoY (-2% QoQ) while KMB would report sequential growth of ~1.3%.

* Margins would exhibit stable trends, supported by lower cost of funds, despite excess liquidity and low lending rates. Large banks with a strong liability franchise are better placed to tackle margin pressure. We expect NII growth of 13% YoY, with ICICIBC ~16%, HDFCB ~13%, and BANDHAN and AXSB 12% each.

* Deposit traction would remain healthy, reflecting 10% YoY growth for the system, with banks focusing on ramping up retail deposits. Most banks indicated rates to have bottomed out.

 

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