Banks: Sector Update - Q4FY21 Panoramic View - HDFC Securities

Mr. Krishnan ASV, Institutional Research Analyst, HDFC Securities

As the Q4FY21 earnings season draws to a close with SBIN, the last among the large banks, reporting its results last Friday, we offer a panoramic view of how banks performed after having navigated an extremely difficult pandemic year. Banks within our coverage universe (~43% loan market share) reported full-year slippages at 2.1% during FY21 (FY20: 2.5%) and ended the financial year with a provisioning buffer of ~1% of risk-weighted assets (RWAs). As large parts of the country continue to be in the throes of a devastating second wave (and in varying degrees of lockdown), we assess the portfolio strength for our coverage banks to identify the stronger franchises that could better weather the storm from potential second-order effects of the pandemic. Our analysis (based on impairment assumptions for H1FY22) suggests that banks that raised equity capital during FY21 have built >50bps higher provisioning cushion than their peers (as % of RWAs). We reiterate our preference for strong deposit franchises and maintain ICICIBC and SBIN as our top large-cap ideas. Amongst mid-sized banks, we prefer CUBK and FB although both banks may need to shore up their capital buffers to ride this wave out.

FY21 Report Card - a storm well-navigated: As we near the finishing line for Q4FY21 earnings, banks within our coverage universe (~43% loan market share) reported full-year slippages at 2.1% in FY21 (FY20: 2.5%) and ended the financial year with a provisioning buffer of ~1% of risk-weighted assets (RWAs). While ROAs and loan growth were lower on a YoY basis throughout the year, banks focused on strengthening their capital buffers and deposit franchises. With system-wide rates near all-time lows, most of our coverage banks benefitted from funding cost tailwinds, with cost of funds averaging ~127bps lower on a YoY basis.

Identifying pockets of vulnerability: As many states in the country enter various degrees of containment and lockdown procedures with the onset of the second wave, we assess the portfolios at risk for various banks and the surplus buffers on their balance sheets. Assuming our coverage banks exhibit similar annualised slippage ratios in H1FY22 as they did in FY21, our capital buffer analysis suggests that banks that did not raise equity during FY21 have ~51bps lower provisioning cushion than their peers (as % of RWAs). Assuming a CET1 threshold of 12%, we identify mid-sized banks such as CUBK and FB within our coverage universe that may need to shore up their capital buffers. More importantly, mid-sized banks are more vulnerable with high geographical concentration risk in their loan portfolios compared to larger banks.

Reiterating our top ideas - ICICIBC still preferred over SBIN: Our core thesis remains relatively unchanged, and we continue to favour strong deposit franchises. ICICIBC remains our top pick with a target price of INR649 (standalone bank valued at 2.1x Mar'23 ABVPS); our thesis is anchored on a strong balance sheet (strong deposit franchise and adequate provision buffer), comfortable capitalisation, and consequent ability to disproportionately gain market share. SBIN, too, offers an attractive risk-reward (target price of INR490; standalone bank valued at 1.1x Mar'23 ABVPS), especially due to its surprisingly strong asset quality performance. Amongst mid-sized banks, we prefer CUBK (target price INR198; 2.2x Mar'23 ABVPS) and FB (target price of INR97; 1.0x Mar'23 ABVPS).

Source : Equity Bulls

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