Mr. Krishnan ASV, Institutional Research Analyst, HDFC Securities and Mr. Deepak Shinde, Institutional Research Analyst, HDFC Securities
Benefiting from a weak pandemic-hit base-year performance (during Q1FY21), we expect our coverage universe to clock an optically strong earnings growth of 38% YoY (-2% QoQ), despite the fact that the quarter was impacted by lockdowns and a devastating second wave. While banks and NBFCs navigated FY21 relatively unscathed on asset quality, we expect signs of weakness in the form of early-bucket delinquencies, accumulation of stressed asset pool due to muted economic activity, and a softer print on collections and recoveries during 1QFY22. The surplus provisioning buffer of ~1% of RWA built during FY21 is likely to ease incremental provisioning; however, lenders are likely to frontload credit costs during 1HFY22 on a prudent basis. Asset growth is likely to remain muted sequentially, marred by disrupted operations, resulting in lower fee income and disbursements on a sequential basis.
While our earlier FY22 forecasts factored in speedbumps along the way, our FY22/23E forecasts remain largely unchanged. We continue to favour large banks with strong balance sheets and strong liability franchises. We raise our implied multiple on ICICIBC (to 2.5x Mar'23 ABVPS) to reflect the relatively lower competitive intensity in the high-RoA credit cards business and our consequent line of sight on the franchise share of the profit pool. We reiterate ICICIBC (TP at INR 770) and SBIN (TP at INR 490) as our top picks among large banks; CUBK (TP at INR 194) and FB (TP at INR 98) among mid-sized banks; and CIFC (TP at INR 613) and CREDAG (TP at INR 813) among NBFCs.
Weaker collection and disbursement environment: Having navigated the COVID crisis in FY21 and emerging relatively unscathed from it, banks and NBFCs are likely to remain focused on asset quality even as the economic activity was largely muted during Q1FY22 on account of COVID infections among employees and lockdowns in major parts of the country. Our channel checks suggest that collections were significantly impacted in Apr-May'21, particularly for the MFI and CV portfolios and are yet to recover to pre-COVID run-rate in Jun'21. While we expect an increase in early-bucket delinquencies and slippages during the quarter, it is likely to be lower than the delinquencies witnessed in FY21.
Provisions likely to be frontloaded during H1FY22: On the back of healthy provision buffers being carried by most banks and NBFCs at the end of FY21, we expect provisioning (201bps) to normalise on a YoY basis (down ~90bps), although it is likely to remain flat on a sequential basis (down ~10bps). Lenders are likely to frontload their loan loss provisions during the first half of the year for expected impairments in the portfolio, although our full year estimates on credit costs remain largely unchanged.
Restructuring on the cards in the absence of moratorium: Banks and NBFCs are likely to exercise "Restructuring 2.0" for stressed assets, in the absence of a moratorium, unlike in COVID 1.0. While banks are likely to remain selective in restructuring stressed assets, we believe that NBFCs (lender category) and the MSME sector (borrower category) are likely to witness the highest amount of restructuring.