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Q1FY22 preview: Riding on waves of disruption as well as recovery

Q1FY22 was distinct in a way as financiers not only experienced the impact of sudden disruption (in Apr-May due to covid outbreak) but also gradual recovery (in Jun). Besides assessing the actual immediate impact of disruption on growth and asset quality, management’s narrative on recovery, outlook and strategy will be equally relevant. Sequential business momentum has been undoubtedly disrupted (as anticipated) but intensity is relatively lower than first wave. Retail disbursements are down 25-30% QoQ but up 2-3x YoY.

Loan growth QoQ is modest at -2/+2% but on lower base of Q1FY21, YoY growth is either steady or has improved. We expect forward flows into delinquency buckets (SMA-1/2, NPA etc) and elevated recognition and provisioning in Q1FY22. Financiers will retain contingency buffer and will further create specific provisions on incremental stress. Restructuring (actual and anticipated) requests will be higher than during the first wave. Credit cost will be the key determinant for driving earnings. Even on a lower base in Q1FY21, we expect single digit earnings growth for financiers.

* Collection efficiency derailed in Q1FY22; forward flow into delinquency buckets to add on stress: Given collections/recoveries were derailed in Apr-May ’21 but at the same time, have picked up in Jun ’21, it becomes relatively difficult to gauge the extent of stress recognition. That too when behaviour has been varied across product segments as well as geography. However, we expect flow through into delinquency buckets (SMA-1/2 pool and NPA) to be higher and are anticipating incremental non-annualised slippages of 0.5-2.0% in Q1FY22, primarily flowing from retail and MSME segments. Corporate portfolio behaviour will be as resilient as last year. The hope is on normalisation kicking in soon post July and recoveries and upgrades leading to less pressure on asset quality in H2FY22.

* Credit cost to be front-loaded and elevated: Besides higher accretion to stress pool, we believe restructuring requests in the second wave will also be relatively higher. This will call for higher specific provisioning. Financiers would prefer to retain contingency buffer at this juncture. Consequently, a significant portion of FY22 credit cost estimates will be front-loaded in Q1FY22 itself and will tend to be elevated (annualised run-rate of 2-6%).

* NIMs compression not playing out since past few quarters: Robust CASA accretion, benefit of deposit cost, shift in portfolio mix towards retail and release of liquidity buffer would offset adverse impact of interest income reversal, CD ratio moderation. Consequently, NIMs will atleast remain stable, if not improve. Also Q4FY21 base of NIMs were lower due to interest derecognition on full year stress and ‘interest on interest reversal’ on loans above Rs20mn.

* Lending momentum disrupted a tad: Most financiers have disclosed -2/+2% Q1FY22 credit growth QoQ. Nonetheless, YoY growth momentum has either been steady or has improved (on a low base in Q1FY21). Retail disbursements are anticipated to be down 25-35% QoQ, albeit up 2-3x YoY. Preference continues in lending towards secured products (home loans, gold loans, auto loans) and to better-rated large corporates, MSMEs.

* HFCs/NBFCs: We expect stage-3 pool in absolute term to rise by 10-15% and stage-2 pool by 25-35%. This is true especially for some SME sub-segments, CVs, cab aggregators, wholesale real estate, etc. Requests for restructuring would also be relatively higher and many financiers would conservatively classify this pool in stage-2 assets.

Our preferences and recommendations: Stress is being managed well by Axis Bank, SBI, HDFC Bank and Federal Bank. Also, sustainability of operating profit for these banks with new normal credit cost trajectory will drive re-rating for these names. We stay with them as our preferred picks. Amongst non-banks, we prefer HDFC, Piramal, Repco and PFC.

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