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Banks Q3FY21 Results Preview - Scope for optimism beyond a tepid 3Q - HDFC Securities

Posted On: 2021-01-13 23:17:13 (Time Zone: Arizona, USA)

Ms. Krishnan ASV, Institutional Research Analyst, HDFC Securities

Our banking coverage universe is expected to clock negligible QoQ growth in NII and PPOP in 3QFY21E, on the back of sequentially flat NIMs and a gradual volume-driven rebound in opex and fee income. Against the backdrop of an in-force SC stay on marking of NPAs, we believe that investors will focus on pro-forma GNPAs, trends in collection efficiency and the likely restructuring pipeline. Incremental provisioning is likely to moderate at AXSB and ICICIBC, which have already built significant buffers; while small and mid-sized private banks are likely to continue witnessing elevated provisions.

Despite benign expectations for 3QFY21E, we raise our FY22/23E earnings by 7% and 10% for our coverage universe, reflecting: (a) lower-than-anticipated eventual loan losses from COVID-19, (b) better-than-expected growth impulses accruing to large private sector banks, (c) reversal of the drag from unwinding of large liquidity buffers, and (d) gradual return of business volume-led pricing power. Our cumulative credit cost forecasts (FY21-23E) have eased by ~130bps for our coverage universe, reflecting this optimism. However, we remain conservative, relative to broader consensus estimates. Any incremental narrative, which suggests better-than-expected growth and asset quality outcomes, poses an upside risk to our forecasts.

Our core thesis continues to favour large private sector banks and is anchored on the back of (a) their relative balance sheet strength (higher standard asset cover), (b) comfortable capitalisation ratios, and (c) consequent ability to disproportionately gain market share. Our top picks remain ICICIBC (target price of Rs 599) and AXSB (target price of Rs 739). Post the recent run-up, we downgrade KMB to REDUCE (target price of Rs 1,686).

All eyes on asset quality: Reported GNPAs will be of little relevance, until the SC order on asset classification is in effect. Pro forma numbers reported by banks, however, will be even more relevant, with the effect of the moratorium behind us. Investors should also watch out for other asset quality indicators such as collection efficiency (trends post the sharp uptick in 2Q) and early bucket delinquencies (SMA 0/1/2). We expect a base-case restructuring pipeline at 100-250bps across our banking coverage universe. With IBC proceedings stalled, large recoveries are likely to remain muted in 2HFY21.

Divergent provisioning trends: We believe provisioning will be driven by early delinquency trends and the likely restructuring pipeline. That said, we expect incremental provisioning at large private banks such as ICICIBC and AXSB, to moderate as these banks have already built significant buffers (~2.2% of loans). Mid-sized and smaller private sector banks, on the other hand, which hold lower buffers, may make relatively higher provisions (vs. their larger peers). Investors should watch for the commentary on further provisioning requirements and utilisation of the existing stock of COVID-19 related provisions. Although derived PCR is likely to rise across banks, this will be largely optical on account of the asset classification standstill.

Divergent growth on either side of the balance sheet: Although YoY loan growth continues to be sluggish, as evidenced by disclosures from select banks (FB, KVB and IIB) and system-wide growth trends in non-food credit, the system witnessed a sequential rebound in credit growth, led by retail loans. On the other hand, system-wide deposits grew ~11% YoY (until mid-December) at nearly double the rate of growth in non-food credit (November 2020). Disclosures by select banks also indicate strong momentum in overall deposits, driven by impressive traction in CASA deposits.

Margins likely to remain stable: Across our coverage universe, we expect stable margins as marginally-declining yields will be offset by a similar fall in funding costs (on account of a favorable CASA mix). However, continued drag from higher liquidity, declining CD ratios and voluntary interest reversals on non-paying loans (not marked as NPA), will weigh down on margins. For our coverage universe, NII is likely to be sequentially flat.

Volume-driven rebound in fee income and opex: Driven by an uptick in business volumes, banks are likely to see a sequential rise in fee income (albeit lower YoY). A pick-up in business volumes would also likely reflate operating expenses and should help assess the structural trends around any efficiency gains from the pandemic period.

Source: Equity Bulls

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