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Capitalizing on opportunities; on track to achieve decade high RoEs

Expect market share of Private Banks to touch 54% by FY30E

* The Banking sector is entering a golden period, with the focus shifting from asset quality issues towards strong growth opportunities, market share gains, and earnings pendulum swings towards decade high RoEs. Large Banks have prudently provided for anticipated loan losses and raised the highest amount of capital, thus equipping them for a sustained turnaround. Private Banks are well placed to accelerate market share gains. We expect their share in the total Banking system credit to increase to ~45%/54% by FY25E/FY30E.

* Earnings estimates for our coverage universe saw a 23%/21% upgrade in FY21E/FY22E from the trough during 1QFY21. Aggregate RoE for Private Banks in our coverage universe is likely to improve to a decade high of 16.3% by FY23E (v/s 10-11% over FY18-20). Among PSUs, we estimate SBIN’s RoE to touch ~15% by FY23E.

* The SoTP story for large Banks provides significant support to overall valuations. Currently, subsidiaries of ICICIBC/SBIN contribute ~20%/~34% to our SoTP. As these businesses further gain scale and market share, contribution of subsidiaries to the SoTP story of Banks is expected to improve.

* We roll forward our multiples to FY23E and our revised TP implies an upside of 23-42% across Banks, barring KMB and BANDHAN, where we maintain our Neutral stance. We estimate that earnings in a Bull case will expand by 13-26% across Banks (barring HDFCB and KMB, where the upgrades are in single-digits).

* Strong earnings growth and improving return ratios will continue to drive a re-rating in Banking stocks, which still trade near or below their five/10-year average valuation multiples (barring HDFCB, ICICIBC and KMB). Our top picks remain HDFCB, ICICIBC, and SBIN. We prefer AUBANK among mid-size peers. AXSB could witness continued rerating on improving asset quality, while IIB could benefit from cyclical tailwinds.

Private Banks: Pace of market share gains to quicken, mix to touch 45% by FY25E

* Large Private Banks are well placed to accelerate market share gains, given their strong capital position, robust liability franchise, and higher provisioning coverage on stressed assets. During 9MFY21, ~57% of incremental loan growth was driven by SBIN, HDFCB, and ICICIBC, with most large Private Banks reporting 3-7% QoQ growth. Though the strong sequential growth is supported by ECLGS disbursements (45% of FY21 YTD incremental loans), the growth in many business segments has crossed pre-COVID levels. We expect the growth momentum to remain strong as we project FY22E/FY23E systemic loan growth at 11%/13%, with the mix of retail loans increasing to 31%. This will be led by 14-19% growth in Private Banks. We estimate Private Banks share in total banking credit to increase to ~45% by FY25E.

Asset quality: Banks finally winning the long drawn battle

* Large Banks have shown strong improvement in collection efficiency, while slippages/restructuring outlook remains in control. Pro forma GNPA/NNPA ratios have increased marginally across Banks like AXSB, HDFCB, and ICICIBC, while SBIN saw a decline of 44bp/27bp. Restructured book across all large Banks stood in the 0.3-0.8% range, boding well for a normalized slippage trajectory from FY22E onwards. Higher pro forma coverage, coupled with higher quantum of contingent provisions (0.5-2.2% of loans), should avert any provisioning shock and aid normalization of credit cost for larger Banks over FY22E/FY23E, though elevated provisioning will continue in a few mid-size peers (RBK, BANDHAN, and DCBB).

Earnings upgrade cycle kick-starts; revival in the investment cycle to aid recovery

* Bank earnings have witnessed a strong rebound as asset quality fears have subsided, while growth momentum across many business segments has touched pre-COVID levels. Earnings estimates for our coverage universe saw a 23%/21% upgrade in FY21E/FY22E from a trough in 1QFY21. Among Private Banks, ICICIBC saw the highest increase (65%/36%) for FY21E/FY22E, followed by ~22% each for KMB/AXSB for FY22E. Mid-size Banks too saw a sharp increase of 20-40%. We expect the earnings cycle to remain buoyant, led by a steady revival in credit growth, healthy margin on deployment of excess liquidity, continued moderation in funding cost, and anticipated normalization in credit cost, mainly across large Banks.

Decadal high RoE to drive further re-rating

* We expect large Private Banks to see strong improvement in profitability led by market share gains, lower cost of funds to support margin, retail bounceback to revive fee income trends, and controlled credit cost as they are carrying excess provisions. We expect aggregate RoE for Private Banks in our coverage universe to improve to a decadal high of 16.3% by FY23E (v/s 10-11% over FY18-20). Among PSUs, we estimate RoE for SBIN to touch ~15% by FY23E. Earning swings and improving return ratios will continue to drive a re-rating in Banking stocks.

Valuations compelling; earnings to rise by 13-26% in a Bull case

* Most Banks are trading near or lower than their five/10-year average valuation multiples (barring HDFCB, ICICIBC and KMB). We roll forward our multiples to FY23E and our revised TP implies an upside of 23-42% across Banks, barring KMB and BANDHAN, where we maintain our Neutral stance after downgrading ratings in recent months. We estimate that earnings in a Bull case will expand by 13-26% across Banks (barring HDFCB and KMB, where the upgrades are in single-digits). In our Bull case, we expect an upside of 26-68% across Banks. Our top picks remain HDFCB, ICICIBC, and SBIN among large Banks. We prefer AUBANK among mid-size peers. AXSB could witness continued re-rating on improving asset quality, while IIB could benefit from cyclical tailwinds.

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