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Q2 FY21 Banking & Financial Services Preview
15th Oct. 2020 th India Equity Institutional Research II Q2FY21 Earning Preview II 15 October, 2020 Page 2
Banking & Financial Services Credit Costs elevated, operating performance slowly improves
MARKET DATA Close 1D (%) 1M (%) YTD (%) Nifty 11,971 0.31 3.90 (1.62) Sensex 40,794 0.42 4.48 (1.11) Bank Nifty 23,874 1.63 6.27 (25.77) USD / INR 73.26 (0.17) 0.42 5.16
COVERAGE STOCKS Current Price Target Price* Market Cap. Fwd P/ABV Company Upside (%) Rating* (INR) (INR) (INR Cr) 2022E HDFC Bank 1,212 1,427 17.7% 6,67,049 3.0x BUY ICICI Bank 407 495 21.6% 2,63,572 1.9x BUY Axis Bank 471 612 29.9% 1,44,134 1.9x BUY IndusInd Bank 623 659 5.8% 43,209 1.0x ACCUMULATE SBI 200 262 31.0% 1,78,492 0.9x BUY Kotak Bank 1,353 1,458 7.8% 2,67,732 4.3x ACCUMULATE Karur Vysya Bank 30 42 40.0% 2,398 0.4x BUY Bandhan Bank 321 431 34.3% 51,692 2.7x BUY
*Note: Target price and recommendation has been retained from previous update reports, unless explicitly mentioned; we will review it post detailed Q2FY21 results analysis. Source: Bloomberg, Data as of October 14, 2020
SECTOR OVERVIEW – Banking . Activity improving sequentially but benefits not broad based: The key indicators of growth have seen improvements but are not broad based. The banks share of incremental participation in investments in G-Sec and bonds is higher than credit outlay supported by targeted lending as risk aversion remained high. The pressure on NIMs is likely to ease as liquidity eases and credit offtake is more pronounced. We expect the banks to focus on restructuring in Q2 and most part of Q3, but the credit costs are likely to remain front ended and elevated.
. System advances growing at ~6% YoY in August, but growth concentrated towards larger players: The system advances have grown at 6% YoY in August 2020 (Source: RBI), driven by NBFCs, MFIs, Housing, durables and government supported segments. We expect the higher proportion of growth to be concentrated with larger banks/players. Moreover the share of investment driven lending is higher as corporate prefer market borrowings. We believe the funding costs is likely to play a major determinant in advance growth expansion, despite favourable Credit-Deposit (C-D) ratios. As disclosed, HDFC Bank, HDFC and Bandhan Bank have clocked robust growth, whereas IndusInd Bank among others are lagging. Similarly, we expect ICICI, Axis and SBI to grow at a satisfactory pace while KMB is likely to remain sluggish. Advances for our coverage is expected to grow at 8.37% YoY.
. Flexibility in Funding costs is now key factor for the bank’s operating performance: We believe the ability to lower its deposit and funding cost without losing its deposit franchise meaningfully is expected to remain a key determinant for management of NIMs as the sharer of low yielding loans rise in the book. We like HDFC, HDFC Bank, Kotak and SBI among these. The CASA of Bandhan is also witnessing an improvement. However, IndusInd Bank is likely to face a double threat of sticky costs and lower share of high yielding loans. Overall deposits for banks under our coverage is expected to grow 16.2% YoY.
. Restructuring underway, credit costs front ended: We believe the banks are likely to focus on restructuring for the current quarter. We therefore expect lower accretions to bad assets. However, banks are likely to front end credit costs as required by RBI regulations. However, the credit costs for the quarter are bank specific. We expect Axis, SBI, KMB, Bandhan, to maintain the relatively elevated provisions, in line with previous two quarter. However, HDFC Bank and ICICI Bank have front ended a larger part of their provisions last quarter.
. Valuation less than historic, rerating company specific: The sector is the most sold off sector since the pandemic. Except marquee names such as HDFC bank and Kotak Mahindra Bank, most banks are trading at P/B lower than historic (30-50% discount). This has been on account of the systemic stress related, unfavourable macros and importantly company specific issues. We believe weak company specific issues are likely to persist as they cautiously tide over turbulent waters. However, the larger banks are expected to fare well by improving the market share and operating performance, enabling further rerating. We like HDFC Bank, ICICI Bank, Bandhan Bank and SBI. ANALYST KRChoksey Research Phone: +91-22-6696 5555, Fax: +91-22-6691 9576 Parvati Rai, [email protected], +91-22-6696 5413 is also available on Bloomberg KRCS
Bank Q2FY21E Q1FY21A QoQ Q2FY20A YoY Remarks
HDFC Bank (INR Cr)
NII 16,602 15,665 5.98% 13,515 22.84% The Bank has reported 16.0% YoY growth in advances and 20.0% YoY in deposits. We expect NII growth at 6% PPOP 13,702 12,829 6.81% 11,698 17.13% QoQ/22.8% YoY on the back of improvement in NIMs driven by lower yields, funding costs and liquidity. PAT 7,577 6,659 13.79% 6,345 19.41% PPOP is expected to grow at 6.8% QoQ/17.1% YoY as Other income improves, albeit a marginal MTM hit. PAT is expected to grow on the back of marginally Advances 10,40,501 10,03,299 3.71% 8,96,984 16.00% lower provisions and tamed expenses. We expect provision to normalize as the bank has front ended Deposits 12,25,938 11,89,387 3.07% 10,21,615 20.00% most of the provisions - nevertheless at ~1%.
ICICI Bank (INR Cr)
NII 9,560 9,280 3.02% 8,057 18.65% We have factored a decent growth in loan book and a PPOP 9,403 10,776 -12.74% 6,874 36.79% marginal drop in NIMs to improve NII by 3.0% QoQ /18.6% YoY. The operating profit is likely to be lower (- PAT 4,427 2,599 70.33% 655 575.96% 12.7% QoQ) on account of the one-off stake sale last quarter, but the fee and business income are poised to improve. We have lowered our credit costs Advances 6,62,427 6,31,215 4.94% 6,13,359 8.00% sequentially as the bank seems to have sufficiently front ended their provisions. Deposits 8,21,602 8,01,622 2.49% 6,96,273 18.00%
Axis Bank (INR Cr)
NII 6,915 6,985 -1.00% 6,102 13.33%
PPOP 6,315 5,844 8.06% 5,952 6.11% Axis Bank is expected to report a 5.6% QoQ growth in PAT on the back of healthier fee income and yet PAT 1,174 1,112 5.56% -112 NM tamed costs. We have factored a marginally lower NIMs on account of repricing and liquidity. We expect the credit costs to remain elevated and the focus to Advances 5,70,000 5,61,341 1.54% 5,21,594 9.28% remain on restructuring.
Deposits 6,50,000 6,28,150 3.48% 5,83,958 11.31%
IndusInd Bank (INR Cr)
NII 3,174 3,309 -4.09% 2,910 9.09%
PPOP 2,874 2,861 0.44% 2,600 10.54% IndusInd Bank is likely to deliver a decline in NII by 4.1% QoQ as growth in advances is tepid at 1.5% QoQ and PAT 506 461 9.85% 1,383 -63.42% NIMs falls on change in mix and sticky costs. We expect PPOP to remain flat sequentially as other Advances 2,01,055 1,98,069 1.51% 1,97,113 2.00% income improves. We continue to factor high credit costs, largely in line as of last quarter as a higher share of book is poised for restructuring. Deposits 2,27,912 2,11,265 7.88% 2,07,193 10.00%
ANALYST KRChoksey Research Phone: +91-22-6696 5555, Fax: +91-22-6691 9576 Parvati Rai, [email protected], +91-22-6696 5413 is also available on Bloomberg KRCS
Bank Q2FY21E Q1FY21A QoQ Q2FY20A YoY Remarks
SBI (INR Cr)
NII 27,486 26,642 3.17% 24,600 11.73% We expect an improving operating performance for PPOP 17,186 16,521 4.02% 14,714 16.79% the bank with NII growth of 3.2% QoQ/11.7% YoY and PPOP growth of 4.0% QoQ/16.8% YoY on the back of PAT 3,139 4,189 -25.07% 3,012 4.23% healthy advance growth, largely stable NIMs, improvement in fee income, despite higher staff costs. Advances 23,00,000 22,98,346 0.07% 21,46,160 7.17% However the bank's provisions are likely to remain elevated on the stress book. Deposits 35,19,363 34,19,363 2.92% 30,33,396 16.02%
Kotak Mahindra Bank (INR Cr)
NII 3,366 3,724 -9.61% 3,350 0.49%
PPOP 2,475 2,624 -5.66% 2,509 -1.33% We have factored a flattish NII growth YoY on the back of lower NIMs and loan growth. The PPOP is expected PAT 1,363 1,244 9.50% 1,724 -20.98% to degrow 5.7% QoQ/1.3% YoY on lower other income and increase in expenses. The PAT is expected to grow Advances 1,98,368 2,03,998 -2.76% 2,13,299 -7.00% 9.5% QoQ/lower by 20.1% as provisions rise vs last year.
Deposits 2,68,032 2,61,524 2.49% 2,33,071 15.00%
Karur Vysya Bank (INR Cr)
NII 551 562 -1.90% 596 -7.50% Karur Vysya bank NII is expected to come in at INR 551 Cr implying 7.5% degrowth on YoY basis amid PPOP 440 474 -7.10% 431 2.17% lockdown. PAT is likely to come around INR 97 Cr. implying a 53.8% growth on YoY basis and 8.6% fall in PAT 97 106 -8.60% 63 53.78% PAT on QoQ basis. Net interest margins are likely to be under pressure in the near terms as the bank is Advances 47,363 46,131 2.67% 49,388 -4.10% reluctant to lend even due to NPA concerns. We have factored decline of 4.1% YoY and 2.2% YoY on Advances and Deposits, respectively. Deposits 60,844 60,065 1.30% 62,213 -2.20%
Bandhan Bank (INR Cr)
NII 2,015 1,812 11.2% 1,529 31.8% Bandhan Bank's Q2 FY21 NII is expected to increase by 31.8% yoy (11.2% qoq) driven by ~20% annual growth in advances. PAT is expected to increase by ~22% PPOP 1,787 1,584 12.8% 1,307 36.8% sequentially; however, higher estimated provisioning while maintaining its operating efficiency would result PAT 671 550 22.1% 972 -30.9% in degrowth in YoY profitability for the quarter. NIMs to improve for the quarter backed by reduction in cost Advances 71,724 69,749 2.8% 59,786 20.0% of funds. As disclosed in bank's provisional figures, overall collection efficiency (CE) was at 92% for Q2FY21 of which CE for micro finance stood at 89%. Advances and deposits have shown growth of 3% and 9% sequentially Deposits 66,153 60,610 9.1% 49,195 34.5% which stood at INR 717.2 bn and 661.5 bn, respectively. CASA ratio also improved to 38.2% and liquidity coverage ratio was at ~157% as on Sept'20.
ANALYST KRChoksey Research Phone: +91-22-6696 5555, Fax: +91-22-6691 9576 Parvati Rai, [email protected], +91-22-6696 5413 is also available on Bloomberg KRCS
Banking & Financial Services Liquidity concerns remain in the near term
Current Price Target Price* Market Cap. Fwd P/BV Company Upside (%) Rating* (INR) (INR) (INR Cr) 2022E Bajaj Finance Limited 3,372 4,095 21.4% 2,02,906 4.9x BUY Bajaj FinServ Limited 6,100 8,203 34.5% 97,074 2.9x BUY Cholamandalam Investments 250 262 4.8% 20,490 2.0x ACCUMULATE HDFC AMC 2,324 3,020 29.9% 49,479 11.3x BUY HDFC Ltd 1,980 2,403 21.4% 3,55,570 4.1x BUY NAM 271 UR - 16,588 5.8x UR CreditAccess Grameen Ltd 682 843 23.6% 9,828 2.5x BUY *Note: Target price and recommendation has been retained from previous update reports, unless explicitly mentioned; we will review it post detailed Q2FY21 results analysis. Source: Bloomberg, Data as of October 14, 2020
SECTOR OVERVIEW: Non- Banking companies . Weakness in trends in AUM of AMCs: While the Average Asset Under Management (AAUM) has grown 6% QoQ (Source: AMFI) between June and September 2020 but the folios has grown a mere 1.83% QoQ. The equity funds have grown 11.4% QoQ but this has been on the back of the market run up, as the folios remained the same as of June 2020. Moreover, there has been outflow across segments between August and September. We therefore expect weak earnings trajectory for AMCs under our coverage.
. NBFCs: Easing borrowing ecosystem but some time away from pristine performance. The easing liquidity measures, TLTROs, schemes by the government has eased pressures on their borrowing ecosystems benefiting the larger NBFCs. Some of these benefits are short term and may unwind by December, which is a monitorable. Nevertheless, banks are been more forthcoming in extending credit to high quality NBFCs. We therefore expect funding costs to stabilise for NBFCs.
. Customer behaviour – a key monitorable: Most NBFCs customers have been hit furthermore than banks as they are relatively high risk. Moreover, their books are way more concentrated on account of fewer books. Both these factors is likely to elongate the recovery for NBFCs. While this is segment and company specific, we expect higher credit costs and lower business to continue to hurt NBFCs. While improvement on the rural side augurs well, improvement in business activity is key. CVs may be laggards as Improvement in business activities has been tepid due to lower load factor and realisations, which may impact them longer. But home loans have shown signs of vigour on account of government benefits and pent up demand. For companies under our coverage, Cholamandalam Investment and Finance Company has proactively provided for its high stress book, and the credit costs are likely to normalise. Bajaj Finance, on the other hand, may face higher charge as the share of unsecured loans are higher.
. Valuation: The sector has not recovered, like a few banks, on account of likely hit to its bottom line, coupled with lower business activity. We believe this gap is likely to sustain as banks are likely to gain market share from NBFCs such as Bajaj Finance amidst weak economy. It may take until Q1FY22 to be able to gauge a pickup in business momentum. While the festive season is likely to enthuse, it needs to be seen if the same is momentary or sustainable. However, the ease of borrowing is a boon. We like HDFC Ltd. (4.1x FY22E P/ABV) and Bajaj FinServ (2.9x FY22E P/BV) in our coverage.
NBFC Q2FY21E Q1FY21A QoQ Q2FY20A YoY Remarks
HDFC AMC (INR Cr)
Revenue 400 411 -2.79% 525 -23.77% We expect a fall in revenues (-2.8% QoQ/-23.8% YoY) as yields EBITDA 301 316 -4.89% 414 -27.23% are likely to fall, despite AAUM growth driven by the market. The AMC is likely to have lost market share to peers. We PAT 257 302 -14.98% 353 -27.09% expect some increase in expenses sequentially that is expected to reduce margins by ~50 bps. AAUM 3,70,000 3,57,500 3.50% 3,68,900 0.30%
ANALYST KRChoksey Research Phone: +91-22-6696 5555, Fax: +91-22-6691 9576 Parvati Rai, [email protected], +91-22-6696 5413 is also available on Bloomberg KRCS
Exhibit 2: Quarterly result expectation for companies under coverage NBFC Q2FY21E Q1FY21A QoQ Q2FY20A YoY Remarks Reliance Nippon Life AMC (INR Cr)
Revenue 279 314.19 -11.30% 307 -9.12% We expect AUM to degrow sequentially, driving the operating PBT 158 192.43 -17.80% 156 1.28% performance down. We expect 11.3% QoQ fall in revenues driven by the fall in AUM but better other income. However, PAT 119 149.66 -20.70% 134 -11.19% further scope for reduction in expenses is unlikely to be visible and is likely to dent profits. AUM 2,06,279 2,73,701 -24.6% 2,03,408 1.41%
Bajaj Finance (INR Cr)
NII 4,001 3,916 2.18% 3,998 0.08% NII is expected to improve by 2.18% QoQ despite 1% degrowth in advances. We expect benefits of lower funding costs to PPOP 2,774 2,825 -1.78% 2,617 6.02% accrue. We expect higher expenses as business activity improves and credit costs to rise as well. The share of secured PAT 724 870 -16.70% 1506 -51.92% book and customer sensitivity to the pandemic is higher.
Bajaj FinServ (INR Cr)
Total Income 14,566 14,192 2.6% 14,224 2.4% Total Income is likely to grow marginally (2.6%QoQ/2.4%YoY). PBT 2,202 2,568 -14.3% 2,626 -16.2% However we have factored higher provisions to dent profits degrowing 13.0% QoQ and 17.2% YoY respectively. PAT 1,673 1,923 -13.0% 2,021 -17.2%
Cholamandalam Investment & Finance Company (INR Cr)
NII 970 940 3.16% 864 12.24% We have factored 1.3% QoQ/16% YoY growth in AUM, with largely stable NIMs. The provisions have been materially front PPOP 650 637 2.02% 618 5.10% ended, and we expect gradual reduction in credit costs gradually. PAT 458 431 6.17% 307 49.04%
HDFC Ltd (INR Cr)
NII 3,680 3,392 8.49% 3,021 21.81% We have factored 8% YoY growth in AUM after its stellar pre- quarter business disclosures. According to their disclosures, PPOP 4,380 4,806 -8.86% 5,284 -17.11% individual loan approvals grew by 9% YoY; individual loan disbursements were at 95% of the level in the corresponding quarter of the previous year. We have factored a marginal PBT 3,480 3,607 -3.52% 4,530 -23.18% improvement in NIMs, however lower other income as the previous quarter clocked an irregular investment sales. Our PAT 2,610 3,052 -14.48% 3,962 -34.12% provisions, though are marginally lower sequentially.
Credit Access Grameen Ltd (INR Cr) Expected NII growth of 58.5% YoY (9.1% QoQ ) backed by NII 398 365 9.1% 251 58.5% improved collections. We expect provisioning to be intact as clarity is awaited given the situation. Profits are expected to PPOP 268 256 4.9% 155 73.1% impact due to provisions; however, we believe operational efficiency to be maintained. CAGL has closed its QIP issue worth INR 800 Cr. on 8th Oct'20 PBT 95 72 31.2% 101 -6.2% at INR 707/share (against floor price: INR 707.69/share). CAGL/MMFL collection efficiency were at 88%/83% as on PAT 12,221 10,753 13.7% 7,407 65.0% Sept'20 v/s 74%/54% as on Jun'20, respectively. ~8% of CAGL and 7% of MMFL borrowers have not done payment so far.
ANALYST KRChoksey Research Phone: +91-22-6696 5555, Fax: +91-22-6691 9576 Parvati Rai, [email protected], +91-22-6696 5413 is also available on Bloomberg KRCS
Rating Legend (Expected over a 12-month period)
Our Rating Upside Buy More than 15% Accumulate 5% – 15% Hold 0 – 5% Reduce -5% – 0 Sell Less than – 5%
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ANALYST KRChoksey Research Phone: +91-22-6696 5555, Fax: +91-22-6691 9576 Parvati Rai, [email protected], +91-22-6696 5413 is also available on Bloomberg KRCS