Mr. Krishnan ASV, Institutional Research Analyst, HDFC Securities
Beyond a favourable base
We expect our coverage universe to clock a sequential PPOP growth of ~10% on the back of improving business traction. With the SC-imposed standstill on NPL recognition lifted, lenders should report a significant rise in slippages and GNPAs. We expect incremental provisions to moderate sequentially across our coverage universe, with lenders having built significant provision buffers during 9MFY21. We expect sequential improvement in business traction in line with rising economic activity.
Our FY22/23E estimates for our coverage remain relatively unchanged, despite the rapidly strengthening second wave of COVID-19 cases in India. This reflects our belief that our current estimates around credit growth and asset quality already factor in potential speed bumps on the path to recovery. Further, sustained fiscal and monetary policy support and the unexpectedly sharp (at the time) recovery in economic activity over 9MFY21 suggest that the potential fallout of slowing real economic activity on the financial system is unlikely to be material.
Our core thesis remains relatively unchanged, and we continue to favour large banks. ICICIBC remains our top pick with a target price of INR645; our thesis is anchored on a strong balance sheet (strong deposit franchise and adequate provision buffer), comfortable capitalisation and consequent ability to disproportionately gain market share. SBIN, too, offers an attractive risk-reward (target price INR462), especially with rising confidence on asset quality performance. Amongst the mid-sized banks, we prefer CUBK (target price INR198) and FB (target price of INR98). From amongst our NBFC coverage universe, we prefer CIFC (target price INR622) and CREDAG (target price INR819). We build in a multiple re-rating in CIFC (4.0x Mar'23 ABVPS) reflecting potential tailwinds likely to accrue to the strongest NBFCs. We downgrade MMFS to ADD reflecting the moderate earnings downgrades to factor in the potential vulnerabilities in its asset book.
All eyes on asset quality: With the SC standstill on NPL recognition lifted, lenders are likely to report a significant rise in slippages and NPLs. However, this should not come as a surprise as most lenders indicated potential stress in the form of pro forma GNPAs in earlier quarters. Asset quality will continue to be the primary area of concern for investors as strengthening recovery in real economic activity in 4Q is met by localised lockdowns amidst rising COVID-19 infections. We will watch for lenders' commentary on recent collection efficiency trends and early-bucket delinquencies. We continue to factor in a gradual improvement in asset quality in FY22E across most of our coverage universe, and we believe that our existing estimates adequately factor in potential speed bumps along the way.
Provisions to dip: Even as reported stress is set to rise, we expect most of our coverage companies (both banks and NBFCs) to register a sequential decline (-18.9% (ex-SBI) across our coverage universe) in non-tax provisions. Consequently, reported PCR may fall optically. For some of the larger banks, recovery from a large NCLT account could be an offset factor. We will watch out for commentary on the need for potential further provisions/ utilisation of current provisions, considering the resurgence in COVID-19 infections.
Sequential uptick in credit growth: Lenders within our coverage universe can see a sequential improvement in credit growth to 3.5%, in line with rising levels of real economic activity seen throughout most of 4Q and the previous quarter's guidance by most lenders. RBI data suggests that system-level credit grew 6.5% YoY until 12th March 2021 and 2.4% between 18th December 2020 and 12th March 2021. Sector-wise bank credit trends indicated robust growth in agricultural credit and improving trends in growth in credit for services and personal loans even as industrial credit continued to languish. Most asset and home financiers within our coverage universe are likely to have seen disbursal momentum sustain/ improve into 4Q. Large well-sponsored NBFCs such as CIFC are likely to fare well on this front, as funding-side benefits allow them to capture resurgent growth.
Strong deposit accretion to continue: Until 12 March 2021, system-level deposits grew 12.1% YoY and 3.3% between December 18th and 12th March, ahead of systemic credit growth. We expect similar trends across most of our coverage universe, which is corroborated by provisional updates released by select banks.
Margins could improve: Banks within our coverage are likely to exhibit stable-to-increasing margins. An analysis of system-level data indicates that weighted average lending rates on private banks' outstanding loans declined by less than 10bps between December and February, even as private banks' median MCLR dipped ~70bps over the past 12 months. Further, the downtrend in private banks' weighted average term deposit rates has continued (~10bps between December and February 2021). Lower liquidity buffers and strong CASA accretion will be further tailwinds to margins. While interest reversals on slippages pose a risk to margins, several banks have already made adequate income reversals/ provisions on pro forma slippages. NBFCs within our coverage will continue to benefit from a benign interest rate environment even as they witness asset-side re-pricing.
Operating expenditure to normalise: With rising levels of economic activity and increasing business volumes, most lenders within our coverage universe should see operating costs inch up to pre-COVID-19 levels. Consequently, efficiency ratios will deteriorate sequentially. This will also allow investors to identify and evaluate the impact of structural cost reduction measures made by lenders over the past year.