Banking, Financial Services, and Insurance sector — Q1FY23 preview: Earnings to be boosted by low base
Growth picked up in Q1; stress pool is likely to subside; HDFC Bank, IIB, SBI and Axis Bank are the preferred picks
Q1FY23 is anticipated to reflect that asset quality woes have waned for financiers and the focus is shifting back to growth. Slippages and credit cost are likely to remain at least stable, if not improve and stressed pool will descend. Post repo rate hike, rise in retail deposit rates by banks lagged the lending (EBLR as well as MCLR) rate hike. We expect the impact on NIMs to be i) relatively more adverse for RBL, IDFC FIRST Bank, IndusInd, Kotak; and ii) favourable for SBI and Axis.
Surge in G-sec and corporate bond yields and consequent pressure on treasury gains will likely drag earnings. Cost structure is expected to remain elevated and advances growth is likely to sustain 2-4% q-o-q momentum. For Q1FY23, we estimate ~17% y-o-y growth in NII for banks, operating profit growth to be flat, while subsiding credit cost and lower base is expected to support >50% earnings growth.
Lending/deposit rates hiked: Post repo rate hike of 90bps, rise in retail deposit rates by banks lagged the lending (EBLR as well as MCLR) rate hike. MCLR was hiked by 25-65bps, with private banks being more aggressive, followed by SBI. Retail term deposit rates have risen across the board but not commensurate with repo hike. Wholesale term deposit rates have witnessed the sharpest spike of 100-170bps in one-year bucket. Savings rate was hiked only by Kotak, IDFCFB, Bandhan and Federal. We expect the impact on NIMs to be i) relatively more adverse for IDFC FIRST Bank (IDFCFB), RBL, IndusInd (IIB), Kotak; ii) favourable for SBI and Axis; iii) for HDFC Bank, IIB and RBL, given 45-50% of loan portfolio is fixed in nature, rise in deposit rate (retail as well as bulk) will likely outweigh lending rate increase. NIM drag due to CRR hike to be limited on excess liquidity.
Treasury profit to take a hit: G-sec yields have surged 60bps since Mar’22 to 7.5% and corporate bond yields by ~70bps. We expect this to create pressure on treasury profits for banks.
Cost structure to stay elevated: We expect continued investment in the franchise, digital spending and focus on retail acquisition to keep cost structure elevated at >20% y-o-y for private banks, albeit down 1% q-o-q (on a higher base).
Advances growth at 2-4% q-o-q: Bank credit is likely to register >2% q-o-q />12% y-o-y growth. Financiers under coverage are likely to report 2-4% q-o-q growth. HDFC Bank, Kotak, IDFC FIRST Bank are estimated to outpace peers with >20% y-o-y credit growth. IndusInd, YES are likely to gain momentum on a lower base to 14-18% growth. RBL will continue to lag industry average growth.
Stress pool to subside; ECLGS not a cause for concern; some slippage from restructuring to flow through: Given contained slippages, we expect improvement in overall stress pool. Recoveries and upgrades momentum is seasonally moderate in Q1. Given the inflationary pressures, rising input costs and surprise hikes in benchmark rates, we will watch out for the extent of decline in asset quality. Behaviour of ECLGS pool and restructured portfolio would be key to watch out for.
NBFCs/HFCs: On a low base, Q1FY23 y-o-y performance may see a sharp spike in disbursements, gained traction in AUM growth and improvement in CE, resulting in better pre-provisioning operating profit trajectory. MFI disbursement derailed due to revised MFI guidelines and slowdown is likely in AUM growth. NBFCs/HFCs’ focus on collections remains intense in overdue bucket to minimise the adverse impact of the applicability of revised recognition norms effective Sep’22. To that extent, while stage-3 assets seasonally rise in Q1, the extent will be contained.
Our preferences and recommendations:
Growth momentum is gaining traction for HDFC Bank, IIB, and stress is being managed well by SBI and Axis Bank, thereby improving visibility on earnings trajectory. We stay with them as our preferred picks. Amongst non-banks, we prefer Mahindra Finance, Aavas, and Aditya Birla Capital.