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Leading private banks’ earnings: Quick read; valuable insights

In this report, we pen down key notable trends from Q1FY22 earnings of leading private banks and management commentary. Also, we have highlighted how they fared vis-à-vis expectations as well as against each other. What encouraged in Q1FY22: 1) Credit cost contained below our expectations despite elevated slippages; 2) MSME segment – new business activation as well as incremental delinquency behaviour better than previous quarters; 3) incremental implemented restructuring and OTR 2.0 request pipeline does not seem concerning.

What gives confidence: 1) Existing provisions covers entire existing GNPA and significant portion of outstanding stress pool; 2) July bounce rates/demand resolution/collection efficiency are just 50-100bps sigh of Mar’21 levels. What failed to cheer: 1) Slippages in retail (especially road transportation and commercial business) and agri segments; 2) mix shift, interest reversals, excess reserves weighed on NIMs.

* Restricted movement for collections led to elevated delinquencies… Management’s ‘employee safety first’ approach restricted movement for collections/recoveries and slippages were elevated than recent quarter’s average. Incremental delinquencies were more than expected for HDFCB, Axis; in-line with expectation for IndusInd and better than expected for Kotak. Bulk of slippages flowed from retail and agri segments. Within retail, road transportation and commercial segments (namely tractors, CV, CEs) were the worst impacted. Corporate portfolio across banks displayed resilience and MSME stress behaviour was surprisingly steady. (refer table 1,2)

* …nevertheless, credit cost was contained below expected levels: Nevertheless, credit cost settled lower than our expectations – for HDFCB at 1.7% (vs our expectations of 1.9%), Axis at 2.3% (2.5%), Kotak at 1.7% (1.9%) and IndusInd at 3.5% (in-line). Provisions were more earmarked towards specific NPA coverage and incremental restructuring. Most banks did not utilise contingency buffer created in FY21 and a few namely HDFC (5bps), IndusInd (20bps) built further buffer. (refer table 3) Some banks, HDFCB and IndusInd, sold NPAs during the quarter and highlighted that they will consistently pursue sell-downs though on a case-specific basis and quantum would be volatile. On the contrary, Kotak did not resort to any sell-downs.

* Marginal incremental restructuring under OTR 1.0; pipeline not high for OTR 2.0: Restructuring under OTR 1.0 has gone up marginally by 10-20% in absolute term post Mar’21. Banks’ management have indicated there was not much rise in MSME restructuring in Q1FY22. Also, restructuring implemented under OTR 2.0 was negligible (less than 5bps of advances). (refer table 5)

* Existing buffer and promising recoveries provide comfort on credit cost trajectory: Cumulative provisions comprising specific, floating, contingency and general for leading banks fully covers existing GNPAs and significant portion of outstanding stress pool. Net stress pool (post provisioning buffer) provides comfort on credit cost trajectory. Banks highlighted July bounce rates/demand resolution/collection efficiency are just 50-100bps sigh of Mar’21 levels. This gives confidence on asset quality stabilising soon; recoveries have been promising in June and July and benefit of improved collection momentum will flow through in coming quarters.

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