India - Q1FY22 Quarterly Preview

Operating metrics are likely to be muted in Q1FY22 led by seasonally weak loan growth, no one-offs in the form of treasury gains/large recovery, and normalization in operating expenses vs Q1FY21. Consequently, we expect NII and PPoP growth of 10% and 1.5% YoY for banks under coverage. NIM could however improve sequentially across several banks led by a low base (large int reversal in Q4FY21) and continued improvement in CoF. Slippages should remain elevated and one could see rise in restructuring post the second wave, especially from the MSME and retail segments. PAT will nonetheless benefit from low base of Q1FY21, where most banks were in the process of strengthening their standard provisioning buffers. We factor in PAT growth of 46% YoY. Impact of second wave on asset quality for large banks should be limited in our view, as seen post the first wave.

Increased slippages and restructuring likely Collection efficiency was impacted in April-June across banks owing to the statewide lockdowns. In the absence of a moratorium, asset quality pain should get reflected in near quarters. Consequently, delinquencies are likely to be elevated and restructuring should rise from current levels, with up fronting of credit cost in H1FY22. Restructurings should mostly come from retail and MSME segments. Unsecured segments like MFI/CC should continue to see elevated slippages. Stress from the MSME segment is yet to show up, and could come with a further lag post the expansion in ECLGS. Nonetheless, we expect the impact of second wave on large banks’ asset quality in the form of restructuring/slippages to be limited, as had been the case in first wave.

Loan growth trends remain muted; Strong CASA accretion continues State-wise lockdowns starting 15 Apr’21 and seasonality are likely to result in sequential de-growth in advances during Q1FY22. RBI data shows that advances de-grew by 1% YTD till June 18th, growing by 5.8% YoY despite a low base. On the other hand, we have seen healthy CASA accretion across banks that have reported provisional data. This could be led by pullback of spending in the aftermath of COVID, apart from high system liquidity and lower TD rates.

Operating profits impacted by lower treasury gains; Opex normalization NIM is likely to rise sequentially across several banks led by a low base (high interest reversal and impact of interest waiver in Q4) and continued traction in cost of funds, though abundant liquidity could have its bearing. NIM Mona Khetan improvement could be more prominent in case of IIB, RBL, and DCB where VP - Research decline in TD rates begin more recently. Operating profits are likely to be +91 22 40969762 sequentially lower across many banks, particularly PSBs, impacted by the [email protected] large recovery from Bhushan power seen in Q4FY21. Modest treasury gains and normalization of operating expenses will also impact PPoP, though Shreesh Chandra Associate higher fee lines vs Q1FY21 should negate some of this impact. +91 22 40969714 [email protected] Top Picks: ICICI , , DCB Bank, CSB Bank

July 08, 2021

Quarterly Estimates Net Interest Income Pre-provision profit (Rs bn) Jun-22E Jun-21 Mar-21 YoY (%) QoQ (%) Jun-22E Jun-21 Mar-21 YoY (%) QoQ (%) AXSB 79.1 69.9 75.5 13.3 4.7 67.1 58.4 68.6 14.9 (2.2) BOB 79.0 68.2 71.1 15.9 11.2 48.7 43.2 62.7 12.7 (22.3) CBK 66.7 61.0 55.9 9.5 19.4 48.6 42.9 57.0 13.3 (14.8) CUBK 4.9 4.4 4.3 12.3 14.5 3.6 3.6 2.8 1.3 26.6 CSBBANK 2.7 1.9 2.8 43.1 (3.8) 1.4 1.3 1.3 8.4 8.5 DCBB 3.5 3.1 3.1 14.2 12.5 2.1 1.9 2.1 9.1 1.7 FB 15.2 13.0 14.2 17.3 7.1 10.1 9.3 8.9 8.2 14.0 HDFCB 176.3 156.7 171.2 12.6 3.0 149.3 128.3 155.3 16.3 (3.9) ICICIBC 108.0 92.8 104.3 16.4 3.5 92.2 107.8 85.4 (14.5) 7.9 INBK 40.8 38.7 33.3 5.2 22.3 28.0 27.5 25.5 1.6 9.8 IIB 37.3 33.1 35.3 12.7 5.5 32.3 28.6 31.3 12.9 3.2 KMB 41.3 37.2 38.4 10.9 7.5 33.2 26.2 34.1 26.5 (2.6) RBK 10.6 10.4 9.1 1.5 16.6 8.2 6.9 8.8 19.2 (6.2) SBIN 279.7 266.4 270.7 5.0 3.4 151.3 180.6 197.0 (16.2) (23.2) Aggregate 945.2 856.6 889.2 10.3 6.3 675.9 666.5 740.7 1.4 (8.7) Source: DART, Company

Profit Before Tax Profit After Tax (Rs bn) Jun-22E Jun-21 Mar-21 YoY (%) QoQ (%) Jun-22E Jun-21 YoY (%) Mar-21 QoQ (%) AXSB 33.3 14.3 133.1 35.7 (6.8) 25.0 11.1 26.8 124.5 (6.8) BOB 12.0 (13.1) NA 26.8 (55.1) 9.0 (8.6) (10.5) NA (186.0) CBK 8.0 4.6 73.4 15.7 (49.3) 5.2 4.1 10.1 29.1 (48.1) CUBK 1.9 2.0 (6.6) 0.5 302.6 1.5 1.5 1.1 (3.4) 33.8 CSBBANK 0.7 0.7 4.1 0.6 28.4 0.6 0.5 0.4 2.8 28.4 DCBB 1.1 1.1 2.7 1.0 6.0 0.8 0.8 0.8 4.1 6.0 FB 5.7 5.4 5.7 6.4 (11.6) 4.2 4.0 4.8 5.4 (11.6) HDFCB 104.6 89.4 17.0 108.4 (3.5) 79.0 66.6 81.9 18.6 (3.5) ICICIBC 56.5 31.8 77.4 56.6 (0.2) 44.0 26.0 44.0 69.1 (0.2) INBK 7.4 6.1 20.5 8.0 (7.0) 5.5 3.7 17.1 48.1 (68.0) IIB 13.0 6.0 115.3 12.6 2.7 9.5 4.6 9.3 106.5 2.7 KMB 21.1 16.6 27.2 22.3 (5.1) 16.0 12.5 16.8 28.3 (5.1) RBK 2.5 1.9 30.7 1.1 124.7 1.9 1.4 0.8 32.2 147.9 SBIN 61.5 55.6 10.6 86.5 (28.9) 45.9 41.9 64.5 9.4 (28.9) Aggregate 329.2 222.4 48.0 382.1 (13.9) 247.9 170.1 267.8 45.8 (7.4) Source: DART, Company

July 08, 2021 2

Credit growth remains elusive (%) 18 16 14 12 10 8 6 4

2

Jun-16

Jun-17

Jun-18

Jun-19

Jun-20

Jun-21

Oct-16

Oct-17

Oct-18

Oct-19

Oct-20

Apr-17

Apr-18

Apr-19

Apr-20

Apr-21

Feb-17

Feb-18

Feb-19

Feb-20

Feb-21

Dec-16

Dec-17

Dec-18

Dec-19

Dec-20

Aug-16

Aug-17

Aug-18

Aug-19 Aug-20 Credit Growth (YoY) Deposit Growth (YoY) Source: DART, RBI

Spreads have benefitted from sharper decline in CoF vs yields

5.0 Spreads - Outstanding lending rates vs TD rates

4.5

4.0

3.5

3.0

2.5

Jul-15

Jul-20

Jan-18

Jun-13

Jun-18

Oct-16

Apr-14

Apr-19

Sep-14

Feb-15

Sep-19

Feb-20

Dec-15

Dec-20

Aug-17

Nov-13

Nov-18

Mar-17

May-16 May-21

PSB Private SCB Source: DART, RBI

However, all time low CD ratio (ex of demon) could impact NIM (%) 80

78

76

74

72

70

68

Jun-16 Jun-20 Jun-17 Jun-18 Jun-19 Jun-21

Sep-16 Sep-17 Sep-18 Sep-19 Sep-20

Dec-16 Dec-17 Dec-18 Dec-19 Dec-20

Mar-20 Mar-17 Mar-18 Mar-19 Mar-21 CD Ratio Source: DART, RBI

July 08, 2021 3

Largely stable Gsec 5/10 yr yields to limit treasury gains (%) 8.5 8.0 7.5 7.0 6.5 6.0 5.5 5.0 4.5

4.0

Jun-16

Jun-17

Jun-18

Jun-19

Jun-20

Jun-21

Oct-16

Oct-17

Oct-18

Oct-19

Oct-20

Apr-17

Apr-18

Apr-19

Apr-20

Apr-21

Feb-17

Feb-18

Feb-19

Feb-20

Feb-21

Dec-16

Dec-17

Dec-18

Dec-19

Dec-20

Aug-16

Aug-17

Aug-18

Aug-19 Aug-20 10yr Gsec 5yr Gsec 3yr Gsec Source: DART, RBI

High provision buffers to limit prov requirements (%) 1.8 1.6 1.6 1.4 1.2 1.2 1.1 1.0 0.8 0.8 0.8 0.6 0.5 0.6 0.6 0.4 0.3 0.3 0.4 0.2 0.2 - -

0.0

IIB

SBI

RBL

CSB

BoB

Axis

DCB

ICICI

KMB

CUBK

Indian

HDFCB

Canara Federal

Std assets buffer % Source: DART, Company

Restructured book to rise from current levels (%) 6 5.0 5 4.3 4

3 2.5 2.6 1.8 2.0 2 1.5 1.0 1.2 0.5 0.6 1 0.3 0.4

0

IIB

SBI

RBL

BoB

Axis

DCB

ICICI

KMB

CUBK

Indian

HDFCB

Canara Federal Restructuring % Source: DART, Company

July 08, 2021 4

Quarterly Estimates

Company Jun-22E Mar-21 QoQ (%) Jun-21 YoY (%) Comments Axis Bank Net Interest Income 79.1 75.5 4.7 69.9 13.3 YoY loan growth to improve to 11% owing to base effect even as QoQ growth is Pre-provision profit 67.1 68.6 (2.2) 58.4 14.9 flattish. NIM to improve to 3.6% as both lower interest reversals and improvement PAT 25.0 26.8 (6.8) 11.1 124.5 in CoF aid margins. Slippages likely to be at 3%, with higher slippages from retail. EPS 8.1 8.7 (6.8) 3.9 106.8 The bank is unlikely to draw down from its COVID provision buffers Net Interest Income 79.0 71.1 11.2 68.2 15.9 Loan growth to moderate to 1-2% YoY as the bank continues to wind down the Pre-provision profit 48.7 62.7 (22.3) 43.2 12.7 international book. NII growth should be healthy at 16% YoY, off a low base, with PAT 9.0 -10.5 (186.0) -8.6 (204.2) NIM at ~3%, lack of large treasury gains to result in weaker PPoP metrics. Slippages EPS 1.7 -2.3 (176.7) -1.9 (193.1) likely to be ~3%, high PCR at 67% to limit credit costs Net Interest Income 66.7 55.9 19.4 61.0 9.5 Expect loan growth of 2% YoY, with a 1.5% sequential decline in loan book. Pre-provision profit 48.6 57.0 (14.8) 42.9 13.3 Slippages likely to be at ~3%, credit costs will be impacted by further rise in PCR PAT 5.2 10.1 (48.1) 4.1 29.1 levels. Restructurings could rise in MSME and retail book. Lack of one-offs from EPS 3.2 6.1 (48.2) 2.8 14.1 treasury gains/recoveries to result in weaker PPoP metrics vs previous two quarters Net Interest Income 4.9 4.3 14.5 4.4 12.3 Advances growth to decelerate to 4% YoY and flattish QoQ. Expect annualized Pre-provision profit 3.6 2.8 26.6 3.6 1.3 slippages to be in the 3-3.5% range for the quarter. Restructuring could rise amidst PAT 1.5 1.1 33.8 1.5 (3.4) second wave. Recoveries remain a monitorable. NIM to rise QoQ and remain closer EPS 2.0 1.5 33.4 2.1 (3.7) to 4% levels Source: DART, Company

July 08, 2021 2

Company Jun-22E Mar-21 QoQ (%) Jun-21 YoY (%) Comments CSB Bank Net Interest Income 2.7 2.8 (3.8) 1.9 43.1 CSB reported loan growth at 24% YoY, with 3.5% sequential de-growth in Pre-provision profit 1.4 1.3 8.5 1.3 8.4 advances, driven by 8% sequential decline in shorter tenor gold portfolio. PAT 0.6 0.4 28.4 0.5 2.8 Non gold book was flattish QoQ. NIM should moderate QoQ (5.4% in 4QFY21) even as declining CoF continue to aid spreads. Slippages likely to EPS 3.2 2.5 28.5 3.1 3.0 be ~2.5%. One could also see rise in std. provisioning cover from current 0.8%. DCB Bank Net Interest Income 3.5 3.1 12.5 3.1 14.2 Advances growth to remain muted at closer to 3-4% levels YoY. NII growth Pre-provision profit 2.1 2.1 1.7 1.9 9.1 to improve to 14% YoY on declining CoF and low base. Slippages could be PAT 0.8 0.8 6.0 0.8 4.1 higher at ~3% levels, recovery prospects remain monitorable. EPS 2.7 2.5 6.5 2.6 4.5 Net Interest Income 15.2 14.2 7.1 13.0 17.3 Reported advances growth of 8% YoY and -1.5% sequentially. NII growth at Pre-provision profit 10.1 8.9 14.0 9.3 8.2 17% YoY to benefit from declining CoF and rise in share of higher yielding PAT 4.2 4.8 (11.6) 4.0 5.4 loans. NIM to be flattish QoQ. Overall stress formation is expected to be EPS 2.1 2.4 (11.6) 2.0 5.6 contained with slippages at 1.8%. HDFC Bank Net Interest Income 176.3 171.2 3.0 156.7 12.6 Slippages could be slightly higher QoQ at 1.8-1.9% but remain well within Pre-provision profit 149.3 155.3 (3.9) 128.3 16.3 expected lines. Restructuring to rise from the current 0.6%, mostly from PAT 79.0 81.9 (3.5) 66.6 18.6 retail segment. NIM should remain range bound at 4.1-4.2%. Loan growth EPS 14.3 14.9 (3.8) 12.1 18.1 reported at 14% YoY and 1.3% QoQ. Source: DART, Company

July 08, 2021 3

Company Jun-22E Mar-21 QoQ (%) Jun-21 YoY (%) Comments ICICI Bank Net Interest Income 108.0 104.3 3.5 92.8 16.4 Loan growth could improve to 15% YoY led by a low base. Expect stable NIM Pre-provision profit 92.2 85.4 7.9 107.8 (14.5) QoQ at ~3.85%. Factor in slippages of ~2.5%. The bank could utilize some of PAT 44.0 44.0 (0.2) 26.0 69.1 the standard provision buffers created earlier (at Rs89bn or 1.2% of loans), EPS 6.4 6.4 (0.4) 4.0 58.5 aiding overall credit costs and RoA Net Interest Income 40.8 33.3 22.3 38.7 5.2 Pre-provision profit 28.0 25.5 9.8 27.5 1.6 Advances to grow by 6% YoY and decline 1% QoQ. Lower treasury gains to PAT 5.5 17.1 (68.0) 3.7 48.1 impact PPoP profile. Factor in slippages of 3%, high PCR aids credit costs. EPS 4.8 15.1 (68.0) 3.3 48.0 IndusInd Bank Net Interest Income 37.3 35.3 5.5 33.1 12.7 Loan growth reported to improve to 8% YoY led by a low base. MFI/CV stress Pre-provision profit 32.3 31.3 3.2 28.6 12.9 and associated commentary remains a monitorable. NII to benefit from PAT 9.5 9.3 2.7 4.6 106.5 lower CoF, NIM should improve unless excess liquidity plays a spoilsport. Provisions to remain high, as management intends to further build up COVID EPS 12.3 12.1 1.6 6.6 85.2 buffers and on up-fronting of second wave related stress. Expect annualized slippages of 4-5% in Q1FY22. Net Interest Income 41.3 38.4 7.5 37.2 10.9 Loan growth to moderate QoQ, but improve to 10% YoY led by a low base, Pre-provision profit 33.2 34.1 (2.6) 26.2 26.5 driven by MSME segment. Slippages expected to be 2.3-2.5% for Q1FY22. PAT 16.0 16.8 (5.1) 12.5 28.3 Provisions to remain high led by both rise in PCR and up-fronting of pain EPS 8.1 8.3 (2.7) 6.4 25.4 associated with second wave. Restructuring may remain low vs peers. Source: DART, Company

July 08, 2021 4

Company Jun-22E Mar-21 QoQ (%) Jun-21 YoY (%) Comments RBL Bank Net Interest Income 10.6 9.1 16.6 10.4 1.5 NII to benefit from decline in CoF and moderation in interest reversals. Pre-provision profit 8.2 8.8 (6.2) 6.9 19.2 Expect slippages to remain high at 5.5%, but moderate from the ~10% levels PAT 1.9 0.8 147.9 1.4 32.2 seen in the last two quarters. Credit costs to remain elevated on rise in PCR EPS 0.3 0.1 111.1 0.3 12.5 as per guidance and up-fronting of second wave related pain. State Bank of - - Net Interest Income 279.7 270.7 3.4 266.4 5.0 Loan growth should be stable at 5-6% YoY, with sequential de-growth in Pre-provision profit 151.3 197.0 (23.2) 180.6 (16.2) advances. NIM to expand QoQ led by moderation in interest reversals. PAT 45.9 64.5 (28.9) 41.9 9.4 Lower treasury gains and rise in opex (wage revisions) to result in de-growth in PPoP, both QoQ and YoY. Expected slippages for the quarter to be at 1.8- EPS 5.1 7.2 (28.9) 4.7 9.4 2%. Source: DART, Company

July 08, 2021 5

Valuation Summary CMP TP P/ABV (x) P/E (x) Rating (Rs) (Rs) FY21 FY22E FY23E FY21 FY22E FY23E Axis Bank 758 875 BUY 2.5 2.1 1.8 35.2 14.5 11.8 Bank of Baroda 85 90 ACC 0.9 0.8 0.6 53.3 6.4 4.0 Canara Bank 153 160 RED 0.9 0.6 0.5 9.9 5.0 3.3 CSB Bank 353 330 BUY 6.6 2.8 2.4 56.2 19.1 14.6 City Union Bank 166 200 ACC 2.6 2.3 2.0 20.7 18.1 14.7 DCB bank 104 160 BUY 1.1 0.9 0.8 9.7 7.0 5.3 Federal bank 87 90 RED 1.2 1.0 0.9 10.9 8.2 7.3 HDFC Bank 1,531 1,800 BUY 4.2 3.6 3.1 27.1 21.1 17.7 ICICI Bank 649 700 BUY 3.3 2.9 2.5 27.7 21.0 18.3 Indian Bank 140 175 BUY 1.6 0.6 0.5 10.5 4.2 2.8 IndusInd Bank 1,028 1,060 ACC 1.9 1.7 1.6 27.1 16.7 12.8 Kotak Mah Bank 1,753 1,900 ACC 6.0 5.2 4.6 49.9 41.5 35.0 RBL Bank 213 290 BUY 2.2 1.0 0.9 50.3 10.6 7.5 State 429 515 BUY 2.0 1.6 1.4 18.8 11.0 9.0 Source: DART, Company

Valuation Summary (…contd) RoE (%) RoA (%) FY21 FY22E FY23E FY21 FY22E FY23E Axis Bank 7.1 14.7 15.7 0.7 1.5 1.6 Bank of Baroda 1.1 8.6 12.5 0.1 0.6 0.9 Canara Bank 5.2 8.1 10.8 0.3 0.4 0.6 CSB Bank 10.5 13.6 15.4 1.0 1.3 1.4 City Union Bank 10.6 11.0 12.2 1.2 1.2 1.4 DCB bank 9.3 11.6 13.8 0.9 1.1 1.3 Federal bank 10.4 12.6 12.3 0.8 1.1 1.1 HDFC Bank 16.6 18.1 18.5 1.9 2.1 2.1 ICICI Bank 12.3 13.6 13.7 1.4 1.7 1.7 Indian Bank 9.9 9.4 13.5 0.6 0.6 0.8 IndusInd Bank 7.6 10.4 12.3 0.9 1.3 1.6 Kotak Mahindra Bank 12.4 12.3 12.9 1.9 2.1 2.1 RBL Bank 4.4 9.1 11.5 0.5 1.2 1.5 8.4 12.8 13.9 0.5 0.7 0.9 Source: DART, Company

July 08, 2021 6

DART RATING MATRIX Total Return Expectation (12 Months)

Buy > 20% Accumulate 10 to 20% Reduce 0 to 10% Sell < 0%

DART Team

Purvag Shah Managing Director [email protected] +9122 4096 9747

Amit Khurana, CFA Head of Equities [email protected] +9122 4096 9745 CONTACT DETAILS Equity Sales Designation E-mail Direct Lines Dinesh Bajaj VP - Equity Sales [email protected] +9122 4096 9709 Kapil Yadav VP - Equity Sales [email protected] +9122 4096 9735 Jubbin Shah VP - Equity Sales [email protected] +9122 4096 9779 Yomika Agarwal VP - Equity Sales [email protected] +9122 4096 9772 Anjana Jhaveri VP - FII Sales [email protected] +9122 4096 9758 Lekha Nahar AVP - Equity Sales [email protected] +9122 4096 9740 Equity Trading Designation E-mail P. Sridhar SVP and Head of Sales Trading [email protected] +9122 4096 9728 Chandrakant Ware VP - Sales Trading [email protected] +9122 4096 9707 Shirish Thakkar VP - Head Domestic Derivatives Sales Trading [email protected] +9122 4096 9702 Kartik Mehta Asia Head Derivatives [email protected] +9122 4096 9715 Dinesh Mehta Co- Head Asia Derivatives [email protected] +9122 4096 9765 Bhavin Mehta VP - Derivatives Strategist [email protected] +9122 4096 9705

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