Look beyond the quarter - Update on Banks and NBFCs - HDFC Securities

4Q was marked by events (YES+COVID-19) that are likely to have serious and lasting implications for the sector. In light of these developments, several banks released pro-forma unaudited financial information, giving investors a flavor of what to expect in 4Q.

YES Impact

The events at YES have adversely impacted depositor sentiments, to which deposit outflows from the bank (~Rs 729bn in 6 months) bear testament.

Various financial institutions stepped in to rescue YES, to prevent widespread systemic impact.

Nevertheless, several relatively financially sound private sector banks (IIB and RBK) have seen significant wholesale deposit outflows as a result of this. Several large banks (KMB), on the contrary saw significant net inflows. We believe this can result in a sustained polarisation of deposit flows towards PSBs and larger private banks as depositors become more risk-averse.

The fund infusion by various financial institutions also virtually rules out the merger of YES and SBIN (positive for SBIN).

COVID-19: The outbreak and resultant disruption to economic activity will have a material impact on growth and asset quality, and it invited a swathe of measures from the RBI (more on all of this here).

Near term implications on the sector include

- Sharp slowdown in growth.
- Reported asset quality movement and LLPs to be impacted by the moratorium and abeyance on recognition of and provision against NPLs.
- Liquidity infusion will address near term liquidity concerns for the banking sector but will impact margins.
- NBFCs are likely to be similarly impacted (growth, asset quality and provisions), except that their problems may be compounded if they do not receive moratoriums from banks that have lent to them. They will also be required to repay capital market borrowings. Pedigreed NBFCs will benefit from the RBI's TLTROs.

Banks

- With already slowing systemic credit growth and COVID-19 related disruptions, we expect banks across our coverage to report significantly slower loan growth in 4Q. Nevertheless, we expect the retail portfolios of banks to have performed better, as this segment saw healthy growth trends until Feb-20 (17.0% YoY growth).

- We expect SBIN, ICICIBC, AXSB and KMB (already disclosed) to report higher deposit growth in 4Q and smaller banks such as DCBB, CUBK, KVB and FB to see muted deposit growth. IIB and RBK (as disclosed) have seen net deposit outflows in 4Q.

Source : Equity Bulls

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