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Covid wave left behind, fintech wave ahead…

The banking sector had seen a sharp decline in business activity owing to lockdowns, especially in April, May 2021. However, trends from July 2021 onwards show faster return towards normalisation, especially on the asset quality front. Most lenders have indicated at an improvement in collections with unlocking of the economy. However, loan growth has not seen a meaningful improvement and has been hovering in the ~6-6.5% range.

This is mainly on account of large industries remaining a drag (owing to deleveraging and subdued capex) while retail and agri loans have shown continued better traction. As markets have been focusing on fintechs as the future of the Indian financial industry, Bajaj Finance, with focus on digital offering, has witnessed a favourable run up recently. We believe that increasing advent of fintech players is expected to broaden the market size by targeting unserved and under-served population through digital means.

Large-cap incumbents (large banks, NBFCs), capable of either investing in developing technology or collaboration and having advantage of scale, seem to remain resilient. In addition, leaders catering to niche segments are expected to continue to grab market share. However, mid and small players without any niche offering are seen at risk of moderation in business growth and market share.

Account aggregator could be another game changer in enhancing financial inclusion. Customer data interchange with their permission, is expected to enable better and faster underwriting through overall assessment of prospective borrower. This will also help in tapping the untapped eligible population as well as cater to demands of the MSME segment of which only 10% is served by formal source of financing.

Banking sector outlook:

* Credit offtake remained modest in H1FY22 on an overall basis, led by partial lockdowns induced, by second wave. Incremental credit offtake may be seen in agriculture, retail and MSME segment; followed by demand for working capital credit and lastly capex.

* We expect industry growth at ~6-8% for FY22E, led by improved demand for housing loans, consumer durables and unsecured credit amid festive season. Bumper kharif crop is expected to boost rural income and, thus, have positive impact on business growth

* Operational performance is seen remaining steady with increase in CI ratio (as operations revive to normal) to be offset by a rise in fee based income and ~5-10 bps improvement in margin in H2FY22

* Asset quality is expected to improve as collections have started to improve meaningfully with operations of on-field staff getting back to normal. Utilisation of recovery from resolution of one large home financier and improvement in collections is seen keeping credit cost sequentially lower though we believe banks will continue to maintain provisions buffer created earlier.

* With lower number of infections, increasing vaccinations and faster unlocking, we believe an economic revival could take place at a faster pace as pent up demand kicks in amid festive season.

* We recommend Axis Bank, HDFC Ltd and Kotak Mahindra Bank among large lenders, CSB Bank & IDFC First Bank in the midcap domain and HDFC Life & SBI Life among non-lenders. Among PSU banks, the legacy asset quality issues are behind and retail NPAs, if any, are not expected to be lumpy keeping scope for provisions under check and earnings improvement. We remain positive on SBI among PSU banks.

Signs of reduction in stress remain positive

Q1FY22 witnessed increasing levels of stress formation, especially in the MFI and retail lending space with the pandemic forcing another round of lockdowns. On-field collections, especially in the NBFC space, contribute around 35-40% share. The same became one of the key reasons asset quality got impacted as field staff faced restricted movements. However, with faster pace of vaccination, unlocking has gathered pace and from July 2021 onwards the scenario seems to be improving rapidly. Collection efficiencies for most large lenders have reached ~95% levels, as indicated in various management commentary.

Further, business updates from likes of Mahindra Finance, a key player in the rural space, have shown a meaningful improvement in collections from 72% in April 2021 to ~95% in July 2021 and 97% in August 2021, indicating a reduction of asset quality stress. HDFC Bank expects a positive surprise on the recovery front from the rural segment.

From the small finance space, Ujjivan SFB has disclosed that collections have improved meaningfully from 78% in June 2021 to 95% in August 2021. These parameters indicate signs of reducing stress, especially in the small loan segment, which was impacted the most in the second wave.

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