Double whammy for some - Sector Thematic - Banks - HDFC Securities

Recent events (YES and COVID-19) are likely to have multiple order and far reaching impacts on the banking sector. COVID-19 will obviously impact growth and asset quality. The events at YES have impacted depositor sentiment, causing them to become more risk-averse, we believe. Consequently, the less obvious (but equally important) impact is expected to play out on the liabilities side. In such a scenario, we believe deposit flows will become more polarised. Larger banks, with strong granular liability franchises, reasonable asset quality performance and sufficient capital are likely to emerge stronger. Consequently, we prefer ICICIBC, AXSB and KMB amongst the large caps. We prefer CUBK amongst the pack of smaller regional banks. We maintain our REDUCE rating on RBK and KVB, despite their sharp underperformance.

Liabilities will be the new assets: Private banks have done exceedingly well on the deposit front in the last two years, capturing ~66-69% of incremental systemic deposits, allowing them to support superior asset-side growth. The events at YES (and PMC) are likely to increase risk-aversion amongst depositors. We believe banks with an excess reliance on bulk deposits and borrowings will be the most impacted. The risk aversion is expected to lead to deposit polarisation towards large private banks and PSBs. Within our coverage, SBIN, ICICIBC, KMB and AXSB are best placed.

COVID-19- the obvious impacts:

Bank credit growth saw slowing trends over FY20E. Non-food credit growth slowed to just 7.3% in Feb-20. This trend was visible across industrial, service and agri credit. Personal loan growth which had remained resilient at 17% is likely to take a significant knock due to COVID-19 related disruptions. Consequently, we've reduced growth estimates for our coverage by ~480bps to ~8.8%, over FY21-22E. Well-capitalised banks with strong liability franchises will make significant m-share gains on this front.

The sector saw an improvement in GNPAs over FY18-1HFY20, with stress rising in 3QFY20. As a result of the disruption to economic activity, the sector is likely to see higher stress. This will be accentuated by delays in resolutions and recoveries. Retail loans, which have seen benign asset quality trends in the recent past, are likely to see a noticeable rise in NPAs. The RBI's moratorium will provide only temporary relief. We expect banks with (1) superior historical asset quality trends (due to lack of precedence) and (2) lower exposure to more vulnerable sectors to be relatively better off. Across our coverage, we've increased our FY21E slippages/ GNPA estimates by ~100/150bps to ~3.3/5.9%.

Mid-tier and smaller banks will face a double whammy (growth + liabilities and asset quality).

While we have reduced our growth estimates and have modeled for higher NPAs, given the high degree of uncertainty around the situation, the outcome is difficult to explicitly model. Our earnings for FY22/22E fall by 21/25%.

Source : Equity Bulls

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