Q4 FY21 Banking & Financial Services Preview

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14th April 2021 th India Equity Institutional Research II Q4FY21 Earning Preview II 14 April, 2021 Page 2

Banking & Financial Services Eye on growth momentum

MARKET DATA Close 1D (%) 1M (%) YTD (%) Nifty 14,645 -1.6 -2.7 4.6 Sensex 47,883 -3.4 -3.1 0.0 Bank Nifty 31,638 -3.1 -11.0 1.1 USD / INR 74.98 0.3 3.4 2.6 COVERAGE STOCKS Current Price Target Price Market Cap. Fwd P/ABV Company Upside (%) Rating* (INR) (INR) (INR Cr) 2023E HDFC Bank 1,400 1,720 22.9% 7,71,954 2.9 ACCUMULATE ICICI Bank 561 640 14.1% 3,87,644 2.1 ACCUMULATE Axis Bank 661 750 13.5% 2,02,593 2.0 HOLD IndusInd Bank 877 1100 25.4% 66,699 1.5 ACCUMULATE SBI 341 450 32.0% 3,04,285 1.2 BUY Kotak Bank 1776 2,050 15.4% 3,51,944 5.6 ACCUMULATE Karur Vysya Bank 55 60 9.1% 4,416 0.9 HOLD Bandhan Bank 332 457 37.7% 53,448 2.1 BUY

*Note: Target price and recommendation has been retained from previous update reports, unless explicitly mentioned; we will review it post detailed Q4 FY21 results analysis. Source: KR Choksey Research, CMP as of 13th April 2021 SECTOR OVERVIEW – Banking Recognition of bad assets After the vacation of the SC stay on recognition of NPA, the banks are likely to recognize the same. Until the last quarter the banks have been maintaining the proforma NPAs and providing for the same, nevertheless. We, hence, believe most banks are unlikely to witness adhoc provisions. Except IndusInd, KVB; the other banks are expected to record lower credit costs sequentially. We expect banks to allocate the contingent provision to specific provisions, providing clarity.

Loan growth tepid yet The loan growth has been tepid due to the risk aversion, weak growth and shift to bonds. We expect the loan to have grown within the MSME, home and other secured retail books. The industry growth rate has been 6.5% YoY as at the end of February (Source: RBI). Amongst companies that have disclosed their growth rates, HDFC Bank has grown 14% YoY. While it has outgrown the industry, the growth rate has been marginally lower than trend. We expect most banks in our coverage growth rate to remain largely sluggish/at par to industry in the quarter.

NIMs to remain rangebound The banks are liable to refund interest on interest on loans, as required by SC. This is a one-off and is unlikely to be material impact on NIMs. We expect NIMs to remain largely range bound, as interest rates have been stable, and the book is skewed to low risk assets for most banks.

Valuation After a surge in prices, prices have softened on account of inflation concerns and increase in yield. The concerns around impact of the second wave and ensuing lockdowns is a monitorable. The capex investment is a positive for the sector. Despite the volatility, most valuations have remained in line with the historical valuation. We like HDFC Bank (3.6xFY23P/ABV), ICICI Bank (2.5xFY23 P/ABV) and SBI (1.5x FY23E P/ABV) for their risk- reward trade off.

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 www.krchoksey.com Thomson Reuters, Factset and Capital IQ th India Equity Institutional Research II Q4FY21 Earning Preview II 14 April, 2021 Page 3 Banking & Financial Services Exhibit 1: Quarterly result expectation for companies under coverage

Bank Q4FY21E Q3FY21 QoQ Q4FY20 YoY Remarks

HDFC Bank (INR Cr)

NII 15,845 16,318 -2.9% 15,204 4.2%

PPOP 15,383 15,186 1.3% 12,959 18.7% We expect an advance growth of 14% YoY driven by secured loans. We expect largely stable credit costs as PAT 8,978 8,758 2.5% 6,928 29.6% last quarter. GNPA are expected to normalize as the standstill has been withdrawn. Deposit are likely to outgrow advances. PAT is expected to increase by Advances 11,32,821 10,82,324 4.7% 9,93,703 14.0% 29.6% YoY/2.5% QoQ.

Deposits 13,99,953 12,71,124 10.1% 11,47,502 22.0%

ICICI Bank (INR Cr)

NII 10,136 9,912 2.3% 8,927 13.5%

PPOP 10,298 8,820 16.8% 7,390 39.3% We expect 14.3% QoQ growth in profits on stable credit PAT 5,647 4,940 14.3% 1,221 362.3% costs. We expect 12% YoY growth in advances and 14.6% YoY in deposits. We expect largely normalized other incomes. Advances 7,22,725 6,99,017 3.4% 6,45,290 12.0%

Deposits 8,83,548 8,74,348 1.1% 7,70,969 14.6%

Axis Bank (INR Cr)

NII 7,667 7,373 4.0% 6,808 12.6%

PPOP 6,640 6,096 8.9% 5,852 13.5% We expect 8.5% YoY growth in advances and 8.61% QoQ growth in profits. We expect lower sequential credit PAT 1,213 1,117 8.6% -1,387 NM costs, despite being elevated than normal times. We expect improvement in other incomes (on a low base). Advances 6,19,883 5,82,754 6.4% 5,71,424 8.5%

Deposits 7,05,529 6,54,140 7.9% 6,40,105 10.2%

IndusInd Bank (INR Cr)

NII 2,607 3,406 -23.5% 3,231 -19.3%

PPOP 2,965 2,973 -0.3% 2,836 4.5% It disclosed 27% YoY growth in deposit (on a low base) PAT 949 853 11.3% 302 214.3% and 4% YoY asset growth. We expect strong profits on normalized credit costs and healthy incomes. While Advances 2,15,054 2,07,128 3.8% 2,06,783 4.0% GNPA are likely to rise optically, credit costs are likely to largely remain stable sequentially.

Deposits 2,56,574 2,39,135 7.3% 2,02,027 27.0%

Bank Q4FY21E Q3FY21 QoQ Q4FY20 YoY Remarks

SBI (INR Cr)

NII 28,530 28,820 -1.0% 22,767 25.3%

PPOP 18,115 17,333 4.5% 15,734 15.1% We expect PAT to grow strongly (on a low base). We expect largely stable credit costs as the asset quality PAT 6,412 5,196 23.4% 3,581 79.1% has been as per expectation and has been steadily provided for. We expect 5.8% QoQ / 7% YoY growth in Advances 25,05,000 23,68,139 5.8% 23,25,290 7.7% advances and 11.2% YoY growth in deposits.

Deposits 36,05,000 35,35,753 2.0% 32,41,621 11.2%

Kotak Mahindra Bank (INR Cr)

NII 3,920 4,007 -2.2% 3,560 10.1%

PPOP 3,443 3,083 11.7% 2,725 26.3% We expect 5.5% QoQ growth in advances and 9% QoQ growth in deposits. We expect 19.5% QoQ growth in PAT 2,216 1,854 19.5% 1,267 74.9% profits on normalized credit costs and healthy incomes. Advances 2,25,880 2,14,103 5.5% 2,19,748 2.8%

Deposits 2,89,103 2,65,304 9.0% 2,62,821 10.0%

Karur Vysya Bank (INR Cr)

NII 554 584 -5.1% 590 -6.2%

PPOP 322 257 25.3% 500 -35.6% We expect a stable advance and deposit profile sequentially. We expect higher credit costs, though PAT 34 35 -2.6% 84 -59.7% largely stable sequentially, to impact profits. The bank has been relatively underprovided for some assets and Advances 49,325 49,512 -0.4% 46,098 7.0% the credit costs are likely to remain elevated.

Deposits 62,029 62,089 -0.1% 59,075 5.0%

Bandhan Bank (INR Cr)

NII 2,325 2,072 12.21% 1,680 38.39%

PPOP 1,963 1,914 2.56% 1,521 29.06% Bandhan Bank's Q4FY21 NII is expected to increase by 38% YoY (12% QoQ) by ~27% annual growth in advances. PAT 656 633 3.63% 517 26.89% PAT is expected to increase by ~3.6% sequentially as well as healthy YoY growth of ~27% due to expected moderate provisioning for the quarter. The bank has Advances 82,621 76,775 7.61% 66,630 24.00% already provided adequate provisioning amid COVID 19 pandemic. NIMs are expected to improve for the quarter. Advances and deposits are estimated to grow by 8% Deposits 74,206 71,188 4.24% 57,082 30.00% and 4% sequentially, respectively.

Banking & Financial Services Monitoring business outlook

Current Price Target Price Market Cap. Fwd P/BV Company Upside (%) Rating* (INR) (INR) (INR Cr) 2023E Bajaj Finance Limited 4,729 5,760 21.8% 2,84,867 5.9 ACCUMULATE Bajaj FinServ Limited 9,807 10,500 7.1% 1,56,113 2.9 ACCUMULATE Cholamandalam Investments 532 550 3.4% 43,662 2.5 HOLD HDFC AMC 2,873 3,200 11.4% 61,153 9.2 ACCUMULATE HDFC Ltd 2,513 3,012 19.9% 4,53,196 3.9 BUY NAM 329 UR - 20,302 UR UR CreditAccess Grameen Ltd 584 843 44.3% 9,035 6.9 BUY ICICI Securities Ltd. 394 578 45% 12,718 12.2** BUY *Note: Target price and recommendation has been retained from previous update reports, unless explicitly mentioned; we will review it post detailed Q4FY21 results analysis. ** For ICICI Securities Ltd., 12.2 is the Fwd P/E 2022E and 2023E. SECTOR OVERVIEW: Non- Banking companies AMC – Largely stable We except AUM to remain stable driven by asset prices, despite the volatility. The inflows in MF remain volatile with the March inflows have been highest in recent times, even as earlier months were weak (Source: AMFI). We also expect yield to improve gradually on mix change and the asset prices and earning to remain stable.

NBFCs: AUM growth to improve sequentially: We expect AUM growth to improve sequentially (partly on low base) and otherwise on improved demand. Product-wise, home loans are likely to continue to have outperformed other segments, though the growth rates are likely to taper. In the pre-result release, HDFC has declared a strong sale to the bank and healthy business. Bajaj Finance has declared a growth in AUM by 4% YoY. The new loans booked were lower by 8% YoY and new customers were higher by 14% YoY. We expect CIFC to grow stronger in LAP and MSME.

Costs to rise: We expect the costs to remain largely stable as the last quarter. Credit costs are likely to be lower sequentially. After the vacation of the SC standstill, the NBFC are expected to recognise NPA and also charge the required provisions for the pandemic affected book. It is likely to be the last quarter of elevated provisions related to the pandemic.

Valuation: After a volatile quarter, valuations across the companies under coverage differ. Most of them trade under their historic averages. While we await the impact and duration of the lockdown under the second wave, FY22 is expected to be a positive change on the back of a low base, growth and improved sentiment and strategic initiatives for select companies. We prefer Bajaj Finance (8x FY23E P/ABV) and HDFC Ltd (4.9x FY22E P/ABV) for their growth opportunity

NBFC Q4FY21E Q3FY21 QoQ Q4FY20 YoY Remarks

HDFC AMC (INR Cr)

Revenue 510 482 5.9% 476 7.2% We expect flattish sequential AUM growth due to the volatility EBITDA 409 386 6.0% 372 10.1% in equities. Debt fund are expected to be positive. We expect a lower PAT on account of normalize other incomes and higher PAT 357 369 -3.3% 250 42.9% expenses AUM 4,09,200 4,06,800 0.6% 3,19,100 28.2%

Exhibit 2: Quarterly result expectation for companies under coverage NBFC Q4FY21E Q3FY21 QoQ Q4FY20 Q2FY21E Remarks Reliance Nippon Life AMC (INR Cr)

Revenue 280 269 4.1% 254 10.2%

We expect 3.3% QoQ growth in AUM driven by inflows and PBT 250 268 -6.7% 37 572.0% change in mix. The volatility and asset prices is expected to impact the AUM. We expect yield to improve sequentially on PAT 188 212 -11.6% 12 1489.0% account of mix change.

AUM 2,20,000 2,13,000 3.3% 2,04,900 7.4%

Bajaj Finance (INR Cr)

NII 4,637 4,293 8.0% 4,679 -0.9% NII is expected to improve on an improving NIM. Advances are PPOP 3,180 2,906 9.4% 3,232 -1.6% have grown by ~5% QoQ, down 1% YoY driven by the festive demand. We expect credit costs to remain elevated. PAT 1,495 1,146 30.5% 948 57.7%

Bajaj FinServ (INR Cr)

Total Income 16,244 15,959 1.8% 13,294 22.2% We expect Revenues to grow ~2% QoQ on strong insurance PBT 3,626 2,777 30.6% 793 357.4% revenues. The NBFC is likely to gradually catch up. We expect lower claims sequentially to benefit profits. PAT 2,716 2,080 30.6% 540 402.8%

Cholamandalam Investment & Finance Company (INR Cr)

NII 1,703 1,286 32.4% 911 87.0% We expect 6% QoQ growth in advances. We expect largely PPOP 1,165 996 17.1% 614 89.8% stable NIMs. Provisions are expected to be lower sequentially - positively impacting profits. PAT 458 409 12.1% 43 974.6%

HDFC Ltd (INR Cr)

NII 4,490 4,068 10.4% 3,051 47.2%

PPOP 4,540 4,347 4.5% 2,683 69.2% We expect ~11% YoY growth in advances. We expect largely stable NIMs. Higher expenses are expected marginally lower profits sequentially even as credit costs are expected to PBT 3,840 3,753 2.3% 1,589 141.7% normalize.

PAT 2,880 2,926 -1.6% 1,085 165.4%

Exhibit 2: Quarterly result expectation for companies under coverage NBFC Q4FY21E Q3FY21A QoQ Q4FY20A YoY Remarks CreditAccess Grameen Ltd (INR Cr) We expect NII growth of ~25% QoQ / 28% YoY backed by NII 378 303 24.56% 296 27.84% improvement in collections and uptick in disbursements during 2HFY21E. CAGL is expected to report profit for the quarter on PPOP 233 170 36.76% 180 29.75% account of limited credit costs, as it has already provided enough provisions during Q3FY21 that resulted into losses. Resumption in economic activities during the quarter would PAT 76 -80 NM 29 163.32% normalize the cost to income ratio. However, asset quality will continue to be a key concern. Loans 12,986 11,254 15.39% 11,099 17.00% According to Q4FY21 Business update of CAGL, consolidated GLP stood at INR 13,878 cr. Collection efficiency (excl. arrears) Borrowings 10,017 9,680 3.48% 9,540 5.00% of CAGL/MMFL improved upto 94%/90% for the month of Mar’21, respectively.

Brokerage Q4FY21E Q3FY21A QoQ Q4FY20A YoY Remarks ICICI Securities (INR Cr)

Revenue 607 620 -2.08% 480 26.38%

Operating 372 383 -3.03% 235 58.13% We expect annual revenue growth of 26.4% in Q4FY21 on Profit account of all time high trading volumes and average daily turnover. ISEC's efforts on operational efficiency is expected PAT 251 267 -5.87% 156 61.25% to deliver healthy operating profits for the quarter with 58% YoY growth. Also, we expect PAT growth of 61% YoY and PAT PAT margin 41.4% 43.1% -167bps 32.4% 895bps margin is expected to improve by 895bps YoY.

EPS 7.80 8.28 -5.80% 4.83 61.49%

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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