HDFC Securities Institutional Research Desk - Report on Leveraged Financials - Sector Update - The final stages of 'easy money'

Krishnan ASV, Institutional Research Analyst, HDFC Securities and Deepak Shinde, Institutional Research Analyst, HDFC Securities.

Leveraged Financials | The final stages of "easy money"

A combination of structural and cyclical factors have resulted in shrinking liquidity buffers and rising cost of funding across financial intermediaries. However, lenders (banks and NBFCs) are likely to have navigated Q2FY23 relatively comfortably, through a combination of real-time transmission and shorter resets. With the RBI keeping a hawk's eye view on the reset frequency, we believe that lenders are witnessing the final stages of "easy money" as they begin exercising discretion on incremental EBLR transmission in order to better navigate the growth-asset quality trade-off. We are below consensus with our loan growth forecasts across the coverage universe (+15% each for FY23 and FY24). Our hypothesis continues to revolve around preference for strong retail deposit franchises, and moderation in risk-adjusted pricing (normalised NIMs) over the next 18 months. We introduce FY25 forecasts across our coverage universe - our top picks are ICICIBC (TP: INR1,087) and SBIN (TP: INR652) among large banks; FB (TP: INR144) and CUBK(TP: INR242) among mid-sized banks; and SBICARD (TP: INR1,229) and CIFC (TP: INR862) among NBFCs.

Banks - lopsided transmission difficult to sustain: With nearly 40% of floating rate loans anchored to the repo rate, banks have witnessed accelerated monetary transmission on the lending side through a combination of real-time pass-through and more frequent resets, resulting in steeper increase in WALR at 41bps compared to a deposit cost spike of 26bps. Despite near-term NIM reflation, we believe that banks will be increasingly faced with a trade-off between margins and asset quality over the next 12-18 months.

NBFCs - protected by the MCLR regime: Ironically, NBFCs have broadly benefitted from credit substitution (away from bonds towards bank lending), since a large proportion of their bank borrowing is anchored to MCLR pricing. Compared to the steep rise in 1y, 3y and 5y spreads over the corresponding G-sec tenor paper, banks have hiked their 1y MCLR only by 66bps. Interestingly, private sector banks have raised their MCLR by a greater margin (65bps) compared to PSBs (45bps) despite a near-identical change in cost of deposits, which is reflective of the diverse liquidity buffers.

Key changes to our operating variable assumptions: Given the extent and pace of system-wide lending rate transmission that has already played out, we are below consensus with our loan growth forecasts across our coverage universe (15% for FY23 and FY24). Given the composition of our coverage universe (largely comprising of banks that are gaining market share), we are arguing a sharp deceleration in system-wide loan growth trends from current levels. The real-time pass-through on lending rates also has implications for stronger near-term NIMs, which are likely to drift incrementally lower during FY24 (blended NIMs for FY24 at 10bps below FY23). We argue that banks will need to exercise caution on incremental EBLR transmission during the later stages of the rate cycle in order to avoid asset quality distractions.

Investment implications: We reiterate our conviction on large banks with strong balance sheet and formidable retail deposit franchises that are likely to continue to gain market share, with ICICIBC (TP: INR1,087) as our top pick. Among NBFCs, SBICARD (TP: INR1,229), on the back of strong rebound in growth (spends, CIF, receivables etc.) and profitability, and CIFC (TP: INR862), on the back of a strong uptick in CV cycle, are our top picks.

Source : Equity Bulls

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LeveragedFinancials HDFCSecurities SectorUpdate Report