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Q3FY23 earnings growth momentum on a sequential basis is likely to be better on the following grounds: i) continuing benefit of upward repricing in EBLR- and MCLR-linked loans is likely to outweigh pressures on funding cost, while NIM trajectory is expected to be positive for most banks under our coverage; ii) advances growth is gaining traction (up >4% QoQ) outweighing deposits growth and further expanding the C/D ratio; iii) absence of treasury hit or possibility of some write-back as G-sec yields and corporate spreads have moderated QoQ. Cost structure is expected to remain elevated though growth rates would be relatively lower. On asset quality front, we expect incremental non-annualised slippages run-rate to be contained in the range of 0.3-0.6% (non-annualised) and credit cost to normalise. For Q3FY23, we estimate >20% YoY growth in NII, >25% YoY growth in PPoP, and ~40% YoY growth in PAT for the banks under our coverage

* Transmission in EBR regime to support further rise in NIMs: Repricing of the lending book, improved traction in better-yielding focused product segments and utilisation of liquidity and excess SLR for growth in advances are likely to offset deposit cost pressures and support gradual rise in NIMs. Amongst banks, 53% of advances of Kotak Mahindra are linked to EBLR, followed by HDFCB and Axis Bank at ~41% each, and SBI at 34%. IndusInd and SBI have relatively higher proportion of loans linked to MCLR at 45% and 41% respectively.

* Credit growth likely to be up >4% QoQ – outweighing deposits growth thereby expanding the C/D ratio: Overall, non-food credit stood at Rs131trn as of 16th Dec’22, up 17.8% YoY / 10.7% FY-TD and 3.9% Q3FY23-TD. On deposits front, total deposits stood at Rs174trn as of 16th Dec’22, up 9.4% YoY / 5.4% FY23-TD and 1.9% Q3FY23-TD. Slower deposits growth vis-à-vis advances led to rise in the C/D ratio to >75.5% from 70.1% a year ago.

* Not much hit from treasury expected on other income: 10-year India G-sec yields fell 7bps in Q3FY23 to 7.33% from 7.40% QoQ and 1-3 year India G-sec yields fell by 5-10bps. To that extent, the hit on treasury portfolio would not be significant, while there is a possibility of some write-back.

* Seasonal agri stress likely to weigh on slippages; slippages from restructuring to be watched: Slippages in Q3FY23 could be higher QoQ due to seasonal agri stress, some technical delinquencies (forward flow from SMA pool) or slippages from the restructured pool. We believe slippages (ex-restructured pool) could be stable QoQ in Q3FY23 given improvement in bounce rates and better collection efficiencies. No chunky corporate slippages are expected. Nonetheless, credit cost is likely to trend towards normalisation from a very low base of Q2FY23.

* NBFCs/HFCs: Q2FY23 business performance for NBFCs/HFCs saw a sharp spike YoY in disbursements and gained traction in AUM growth. Even in Q3FY23, the momentum gained may sustain. Asset quality trajectory would be contingent on implementation of new NPA norms with effect from 1st Oct’22 resulting in higher reported stage-3 pool. Companies have created macro-prudential provisioning against the same and the impact on credit cost will not be meaningful. New collection rhythm would however take 1-2 more quarters to normalise and convergence of GNPA and stage-3 would be possible thereafter.

Our preferences and recommendations:

Growth momentum is gaining traction for HDFC Bank, and stress is being managed well by SBI and Axis Bank, thereby, improving visibility on earnings trajectory. They remain our preferred picks. Amongst non-banks, we prefer Aavas, Aditya Birla Capital and Power Finance Corporation (PFC).

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