Mr. Darpin Shah, Head Institutional, HDFC Securities
For most banks within our coverage, earnings were ahead of estimates on account of higher-than-expected NII and core fees and lower-than-expected provisions. Loan growth expectedly slowed while deposit growth remained strong, led by strong traction in CASA balances. Despite the continued drag of surplus liquidity, several banks reported a sequential rise in NIMs, driven by the favourable deposit mix. We believe NIMs have peaked in the near term. GNPAs dipped QoQ as slippages were optically lower, on account of the recent SC order. Collection efficiency rose sharply across the board, crossing 90%, which was a significant positive surprise. A sustained uptick in collection efficiency from hereon would demonstrate lenders' better-than-expected resilience to external shocks.
Our core thesis continues to favour large private banks with strong funding profiles as defensive plays in a likely risk-off environment. ICICIBC and AXSB remain our preferred bets, despite the sharp run-up, given their comfortable capital position, strong deposit franchises and significant provision buffers. Amongst the mid-tier banks within our coverage universe, we prefer CUBK. Post the recent run-up, we downgrade IIB to reduce.
Asset quality trends: Our overall universe reported negligible slippages at just 62bps and an 11.2/4.8% YoY/QoQ decline in reported GNPAs, they stood at 8%. However, this was optical due to (1) the impact of the recent SC order staying asset quality downgrades, and (2) the completion of the moratorium. Our private bank universe reported GNPAs of 4.1% (-8/-37bps) while our PSU bank universe reported GNPAs of 10.2% (-200/-40bps).
Collection efficiency improves- a positive surprise: Perhaps the single most important and surprising metric this quarter has been collection efficiency. Most banks reported a significant improvement in collection efficiency (most banks reported a collection efficiency of 90%+). However, such disclosures lacked consistency in terms of (1) calculation (inclusion of overdues in the denominator), and (2) the reporting period. Nevertheless, we expect GNPAs to rise sharply. We build in GNPAs of 5.7% in FY21E (vs. 4.9% at present for our coverage universe). If the uptrend in collection efficiency seen in 2Q persists, not only would it pose an upside risk to our earnings estimates, but it would also demonstrate the sector's improved resilience to external shocks.
Non-tax provisions dipped ~15% sequentially (-9.2% YoY), for banks within our overall universe. In the case of our private bank universe, provisions were 24.6% lower QoQ, but 32.8% higher YoY, as several private sector banks continued to insulate their balance sheet from the potential credit impact of COVID-19. Notably, BANDHAN held COVID-19 provisions equivalent to 2.3% of loans, while for AXSB and ICICIBC, this figure stood at 2.2% and 2.3% respectively (including contingent and standard asset provisions). Mid-tier banks within our coverage held relatively lower COVID-19 related provisions- IIB (1.1%), CUBK (~0.9), DCBB (~0.6%) FB (~0.5%), and KVB (~0.5%).
Led by optically lower GNPA accretion, our overall universe reported a 1067/347bps increase in calculated PCR to 74% (77% in case of our private bank universe and 73% in case of our PSU bank universe).
Loan growth continues to slow, unsurprisingly: YoY credit growth, for our overall universe, slowed to 4%, and QoQ growth came in at just 40bps. While the general trend of slowing credit growth persisted across private banks, PSU banks and SFBs alike, the extent differed. Our private bank universe reported YoY credit growth of 6.4% (vs. 8.4% in 1QFY21 and 14.8% in 2QFY20). Our PSU bank universe reported YoY credit growth of 2.6% (vs. 3.9% in 1QFY21 and 4.9% in 2QFY20). Our coverage universe reported growth in line with our private bank universe at 6.4% YoY. Further, across banks, growth rates within credit segments varied. However, most banks saw strong gold loan growth and QoQ growth in loan to MSMEs, led by disbursals under the NCGTC scheme. This is also reflected in the growth in overall credit to medium industries (+14.5% YoY) and traders (+11.5%). We forecast our coverage universe to register a 10% loan CAGR over FY21-23E.
Funding side trends- CASA deposits drive overall deposit growth: Our overall universe clocked a deposit growth of 10.2/1.8%, led by banks within our private bank universe, which registered a deposit growth of 11.9/3.4%. Within our private bank universe, banks which had seen significant deposit outflows in 4QFY20 reported strong sequential deposit growth-IIB (+8.1%), RBK (+4.5%) and YES (+15.7%). Large private banks such as HDFCB (+20.3/3.4%) and ICICIBC (+19.6/3.9%) continued to report strong deposit growth. Few mid-tier banks such as DCBB (-2/-2.2%), CUBK (2.4/1%) and KVB (-1.8/1.8%) reported much slower deposit growth. However, retail deposit growth was much higher.
Deposit growth for our overall universe was led by CASA growth (+15.2/3.9%). Private banks fared particularly well on this front, reporting 15.8/7% CASA growth, in turn led by 14.6/12.3% CA growth (partly seasonal). Most banks within our coverage continued to report a rise in the proportion of deposits from retail and small business customers. On this front, AUBANK fared spectacularly, reporting a 58.3/18.7% growth.
Our overall universe reported a QoQ decline in the ratio of borrowings to assets to 8.1% (-120bps), led by our private bank universe (11.5%, -180bps). Most banks within our coverage continued to report a QoQ rise in LCR.
Margins positively surprise: Within our private bank universe, divergent trends were visible on this front with BANDHAN, HDFCB, ICICIBC, IIB and RBK reporting a QoQ contraction in NIMs. Most of the banks within our PSU bank universe reported a QoQ expansion. Most banks expectedly witnessed a downtrend in yields and CoF, in line with falling interest rates. Banks within our private bank universe saw a sharper decline in their CoF than their PSU counterparts. We continue to expect banks within our coverage to witness a downtrend in NIMs over FY21E.
Core fee income bounces back: For most of our coverage banks, other income was ahead of our estimates, led by a strong sequential rebound in core fee income. Banks such as AXSB (+47.2% QoQ), DCBB (+19.3% QoQ), HDFCB (+49.5% QoQ), KMB (+87.7% QoQ), and RBK (+36.9% QoQ) led this trend. Banks within our PSU bank universe witnessed a 2.2% QoQ rise in other income. As expected, the treasury gains were lower on a QoQ basis.
Muted operating expenditure growth: Despite the uptick in business volumes reported by several banks, operating expenditure growth for our overall universe was relatively muted at 5.6% YoY (+9% QoQ) when compared with NII growth (+15.6/5%). Banks within our private bank universe reported a 1.4/9.2% rise in operating expenditure, while those within our PSU bank universe reported an 8.1/8.7% rise.