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Q4FY21 preview: Revived business growth momentum; asset quality narrative key

Business updates released for financiers in Q4FY21 suggest revived business growth momentum, both on credit (3-6% QoQ growth) as well as deposit front (5- 10%). However, key to watch out for in Q4FY21 earnings would be: 1) Actual stress tagging and reported GNPAs - though not much deviation is expected from pro forma NPAs; 2) provisioning build-up (both on incremental stress and contingency, if any); 3) narrative on Covid second wave impact – financiers will be conservative in not utilising the contingency buffer; and 4) how benefit of funding cost and portfolio mix shift offsets interest on interest reversal and lower CD ratio. Uptick in credit growth, stable NIMs, seasonally strong fee income in Q4 will support operating profit growth (>5%/20% QoQ/YoY growth ex-YES). Credit cost will be the key determinant for earnings driver – on a lower base in Q4FY20, we expect >60% earnings growth for banks ex-YES.

* Actual stress tagging in Q4FY21; legacy corporate to add on to stress: With interim relief on NPA tagging being vacated, we will see actual stress recognition in Q4FY21. Albeit, there is unlikely to be much deviation from pro forma NPAs reported in Q3FY21. We expect incremental slippages (non-annualised) of 1.0-2.5% (over 9MFY21 pro forma) primarily flowing in unsecure retail, bus operator segments etc. thereby, driving NPAs sequentially up. Corporate stress recognition, that was almost non-existential in 9MFY21, might resurface in Q4FY21 (few legacy accounts). With collection efficiency steadily improving, we expect secured retail and SME slippages to settle relatively lower than Q3FY21.

* Credit cost unlikely to throw any negative surprise: Financiers have made upfront specific provisioning on pro forma stress for 9MFY21. Specific coverage with standard + Covid-related buffer seemed sufficient for the existing stress pool lowering risk of credit cost volatility. However, resurgence of Covid and imposition of restrictions do pose a risk of activity disruption and lower collections. It can defer the revival of some vulnerable segments, e.g. hospitality, tourism, MSME, MFI, etc. and we believe utilisation of contingency buffer would be limited. Consequently, it would call for specific provisioning on incremental stress as well approved restructuring. Managements’ narrative on business impact due to second wave, and is there any activity moderation or dent in business/consumer confidence will be key.

* NIMs compression not playing out since past few quarters: Robust CASA accretion, benefit of lower deposit cost, shift in portfolio mix towards retail and release of liquidity buffer would offset adverse impact of interest income reversal and CD ratio moderation, thereby, stabilising NIMs. Also, reversal of interest on interest for loans above Rs20mn during moratorium period (as per Supreme Court’s verdict) will have varied impact on banks.

* Warming up credit engine– encouraging trends QoQ: Most financiers have disclosed 3-6% Q4FY21 credit growth QoQ. They are warming up credit engine to a select few less risky segments for growth – secured retail lending and some pickup in industry and service sector credit. Some banks from negative or flat growth have moved in low single digit positive growth territory.

* HFCs/NBFCs: Q4 is seasonally strong both on sourcing as well as collections. However, trend would be divergent across product categories: home loans to lead, CV, cab aggregators, wholesale real estate to drag. Given NBFCs/HFCs have relatively higher proportion of SMA-2/3 pool in Q3FY21, endeavour to manage stress pool sequentially lower will be key to watch out.

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