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Revenue momentum modest; credit cost moderation to drive earnings

We expect our banking coverage universe to report earnings growth of 49% YoY and 26% QoQ in 3QFY22E. Loan growth is likely to be 9% YoY (4% QoQ) for 3QFY22E led by sequential pickup in retail and SME segments while corporate credit growth continues to be sluggish. NIMs are likely to remain range bound with a slight downward bias given excess liquidity in the system. However, we expect large banks to navigate these margin pressures well and lower slippages vs 1HFY22 should aid NIMs. Non-interest income should improve sequentially (+5% YoY) though absence of treasury gains vs recent trends will be a drag on overall topline (Net Revenues +7% YoY, 3% QoQ) and PPOP (+3% YoY, +13% QoQ). Operating expenses were high in 2QFY22 (+26% YoY, +18% YoY (ex-SBIN)) and we expect similar trend to continue (3QFY22E Opex +12%YoY) given continued investments in technology, sourcing and collections by most players. Credit costs should begin moderation for larger players while we expect smaller players to yet see elevated credit costs (especially in SME and microfinance segments).

We continue to prefer larger banks given their position on strong capital situation, consistent improvement in liabilities and ability to invest in technology. These factors make them better placed to ride the intense competition in retail lending as well as better positioned to a potential uptick in credit demand. ICICIBC, HDFCB and AXSB are our top picks in the sector.

The table below summarises our estimates for 3QFY22E for banks under coverage-

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