BFSI - Q2FY21 preview: Quarter of narratives beyond numbers

Q2FY21 earnings for BFSI sector will be reflection of a path half way through normalisation on some parameters (origination, collections), but just the beginning of journey for stress recognition and downward NIM trajectory. Key to watch out: 1) Narrative on quantum and texture of restructuring (actual + potential) post moratorium; financiers suggesting low single digit; 2) slippages from SMA-1/2 pool as of 1st March and prudent recognition of stress; 3) provisioning build-up (both on restructured and contingency, if any); 4) retracement of fee income and support from treasury profits; and 5) extent of cost flexibility retained. Modest credit growth (7-8% up YoY, 2% QoQ) and NIM compression will cap revenue growth to sub-5%. Cost containment will support 10% operating profit growth; however, elevated credit costs will lead to earnings (pre-tax) decline of >10%. Optically, PAT growth of 15% will be led by tax benefit.

Q2FY21 - Focus more on narratives, less on number print

- Restructuring quantum and texture - low/mid-single digit is base case assumption: Post lifting of moratorium, many morat customers have honoured EMI obligation for September (as well as some earlier months) but some may seek restructuring. Narrative on restructuring requests actual (received) and potential (till December) along with its nature (severe, moderate, mild) will be key. Most financiers indicated they will be vigilant in approving restructuring (after case-to-case assessment) and will be in low-to-mid single digit. Amongst categories, restructuring will not be entertained much for MFI, credit card, 2-wheeler loans (will be written-off/provided), restructuring of home, corporate loans will be low and will be relatively higher for SMEs, CVs, wholesale real estate, cab aggregators etc.

- Credit cost build up from restructured pool and towards contingency: Slippages from SMA-1/2 pool as of 1st March and prudent recognition of stress will drive NPL movement, partially offset by aggressive write-offs. Supreme Court's order restrains banks from tagging standard assets as NPL; however, the outcome of judgment on the day of result announcement will decide the path towards recognition. Provisioning on restructured pool and further contingency buffer (if any) may keep credit cost elevated in Q2FY21. With visibility kicking in, management's guidance on credit cost for FY21/22E will be well appreciated.

- NIMs to trend downward: Deciphering the trends in banks' MCLR, deposit rates, lending spreads (both over deposit rates as well as outstanding over marginal rates), asset mix change, stress recognition and CD ratio moderation, we fear more downside risk to banks' NIM trajectory (if not in Q2FY21, definitely in H2FY21).

- Growth to moderate: We expect credit growth at 6-8% YoY (2% QoQ). SME lending (under ECLGS) and some pickup in retail loans (from low set in Q1FY21) should provide support. HDFC Bank, Axis, SBI, among others, to fare better. Retracement expected in fee income with pickup in business volumes (compared to Q1FY21) though support from treasury gains will be not so high. After outperforming expectation on cost containment in Q1FY21, continued flexibility is key to watch out.

Few tweaks in target price and recommendations:

Re-assessing players on SAAP framework, drawing comfort from improved visibility and lower volatility, we revise target price upwards for IndusInd Bank, SBI, PNB Housing, Spandana, Shriram City Union and Cholamandalam. With revised TP, we now recommend 'ADD' on IndusInd (one notch down from 'BUY') and maintain 'BUY' rating on SBI, Cholamandalam, Spandana and 'HOLD' on PNBHF and SCUF. Retaining target price, post correction in Shriram Transport and AU Small Finance Bank, we upgrade both the stocks to 'BUY'. Our top preferences remain: HDFC Bank, Axis, SBI, HDFC, Federal, among others.

Source : Equity Bulls

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