Q2FY22 will be characterised by an uptick in disbursements and collections with recovery in business activities. Loan portfolio has witnessed gradual accretion all through Q2FY22 with signs of improvement in pockets. On a low base, banks have reported 4-6% QoQ loan growth and YoY growth momentum too has gained traction. With collections/recoveries improving MoM, we expect forward flows into delinquency buckets to be restricted. Unwinding of stress and upgrades into standard bucket will be higher for NBFCs compared to banks. Despite gradual moderation from Q1FY22 base, stress pool (including stage-2 and restructuring) will still be elevated. Credit cost will subside QoQ but normalisation seems a quarter to two away. Restructuring under OTR 2.0 will continue in Q2FY22 within the guided/anticipated range. With respect to corporate credit, recovery from Dewan Housing Finance and stress recognition for SREI will keep trend volatile across banks. We expect <10% YoY/flat QoQ growth in operating profit for financiers and earnings on low base are expected to grow at 24-25% YoY/QoQ.
Our preferences and recommendations:
- Collection efficiency improving MoM; forward flow into delinquency buckets to be restricted: Post June'21, lenders have witnessed MoM improvement and normalisation of collection efficiency (CE). By Sep'21, in several product segments, CE was better than Mar'21 level and near to pre-covid average. We believe forward flow into delinquency bucket will be restricted in Q2FY22. With better recoveries and collections, there will be improvement in overall stress pool. We are anticipating incremental non-annualised slippages of 0.5-1.0% in Q2FY22, primarily flowing from retail and MSME segments. Corporate portfolio behaviour will be as resilient (except for SREI slippage offset by DHFL recovery). Unwinding of stress and upgrade to earlier bucket (stage 2 from stage-3) will be higher for NBFCs compared to banks.
- Credit cost to subside; normalisation a quarter to two away: With front loading of provisions and creation of buffers in Q1FY22 as well as FY21, we believe credit cost will settle at level lower than Q1. However, normalisation to steady state credit cost is still couple of quarters away. We believe financiers would only partially utilise contingency buffer and will prefer more to carry it forward for future contingencies.
- Lower slippages, liquidity release, CASA accretion to support NIM profile: Relatively lower slippages, shift in portfolio mix towards retail, some release of liquidity buffer and robust CASA accretion should support margin profile. We believe benefit of lower deposit cost is largely reflected and incremental NIMs can draw support from CD ratio expansion and utilisation of surplus liquidity.
- Growth regaining momentum but gradually; corporate credit still drags: Bank credit data suggests gradual MoM accretion in credit pool with signs of improvement in pockets. Bank's home loan portfolio has stayed put since Mar'21, credit cards have sustained momentum, vehicle loan momentum has moderated due to supply side constraints, and large industry credit continues to drag. Most banks have disclosed 4-6% QoQ loan growth and on a low YoY base of Q2FY21, growth momentum has improved for most of them. Amongst players, HDFC Bank (up 4.4% QoQ), Bajaj Finance (up 7% QoQ) continue with relatively better traction, IndusInd (up 5.3%), YES (5.7% QoQ), AU (4% QoQ), Federal (3% QoQ) and IDFC FIRST Bank have gained momentum after modest growth in the past quarter and RBL lagged peers with flat QoQ advances.
- HFCs/NBFCs: With restricted forward flow into delinquency bucket and incremental restructuring, we expect stage-3 pool in absolute term to moderate by ~5-10%. Despite gradual moderation, stress pool (including stage-2 and restructuring) will still be elevated. Credit cost will be driven by restructuring quantum, stress flow stress and write-offs. Credit cost may subside compared to Q1FY22.
Stress is being managed well by HDFC Bank, SBI, Axis Bank, and Federal Bank with growth too gaining traction thereby, improving visibility on earnings trajectory. We stay with them as our preferred picks. Amongst non-banks, we prefer HDFC, Chola, Repco.