Banking Healthy performance across board for most players Sector Update

Q4FY2021 Results Review Q4FY2021 was a strong quarter with most reporting healthy earnings growth, an improving growth and asset-quality outlook with manageable NPL performance. For Sector: Banking ’s coverage universe, aggregate PAT of private banks grew by 112% y-o-y and PSU banks posted healthy PAT performance (Q4FY2020 aggregate was net loss). Sector View For the quarter, slippages remained elevated, restructuring increased, credit cost rose, and profitability was impacted mainly as banks reverted to IRAC norms (normalised) based NPA recognition and, hence, was along expected lines. Private banks’ advances Private Banks Positive grew faster than the system and resulted in continued market share gains. Coupled with PSU Banks Selectively Positive strong deposit growth, notably low-cost CASA deposits and reduced cost of funds led to better margins. Even compared on a proforma basis, most private banks performed well and reported improvement (even if only a slight one) and manageable slippages and credit cost. Hence, the Reported GNPA as compared to proforma GNPA for Private banks was within 50-200 bps range for most private banks, excluding some new-age Our coverage universe banks with relatively high exposure to micro and SME loan segments. PSU banks also Companies CMP Reco. PT (Rs) posted decent earnings, but advances growth remained tepid due to capital constraints (Rs) and credit cost is also at elevated levels. SBI was easily the best performer among PSU PSU Banks banks and continued to see improved asset-quality performance along with gaining State of 430 Buy 520 market share on the advances front. PSU banks and micro-lenders reported a higher restructured book, which was largely within the manageable range. Gap of proforma Bank of 85 Buy 100 versus reported GNPAs was higher for PSU banks and small-ticket/micro-loan players. Baroda We expect PSB’s margins to be rangebound due to credit cost outlook, which is yet to regain clarity and growth outlook is still weak. However, any progress on recoveries Punjab 42 Hold 48 from IBC/NCLT would be a re-rating trigger going ahead. We believe low interest rates, National Bank encouraging vaccination progress, and recovery in economic activity are potent positives 80 Buy 100 for the financial sector. We prefer structurally strong players with high capitalisation Private Banks and robust book quality. The earlier apprehension regarding an unwieldy restructuring pipeline was ameliorated through proactive provisions and improving collections. ICICI Bank 636 Buy 800 We believe asset-quality outlook has improved for the banking sector. Management 739 Buy 900 commentary is also positive, albeit tempered with caution across the board, with most HDFC Bank 1,486 Buy 1810 banks guiding for improvement in growth outlook in H2FY2022E and a low/manageable restructuring pipeline. Federal Bank 86 Buy 95 Outlook IndusInd Bank 1,015 Buy 1340 Retain Positive view on the banking sector, find private banks attractive; SBI is the best Kotak 1,794 Buy 2130 bet in PSU banks: The Supreme Court has rejected the plea seeking loan moratorium, Mahindra Bank interest waiver, and financial reliefs from the government. The Supreme Court observes RBL Bank 218 Buy 240 that it is not for the courts to dictate government policies and that it is not an expert in matters of finance. We believe the continued external/regulatory as well as the judicial 169 Buy 225 City Union view are supportive and positive for health of financial system. On the asset-quality Bank front, we expect FY2022E to begin with lower legacy pressures for banks. Asset-quality AU Small 1,046 Buy 1350 issues are better placed as slippages were lower (for most banks, private as well as PSU Finance banks) sequentially. Management commentary was also positive, albeit tempered with caution across the board, with most banks guiding for improvement in growth outlook in H2FY2022E and a low/manageable restructuring pipeline. We believe low interest rates and recovery in economic activity are potent positives for the banking sector. Resumption and acceleration of NCLT/IBC proceedings will be positive triggers. We retain preference for private banks and upgrade our view to positive for few PSU banks as well, as they emerge from asset quality/capital constraints. Valuations Most banks indicated a shift from the risk-off stance to a more proactive growth outlook (in varying degrees). We have fine-tuned our earnings estimates for the sector. We believe collection trends for H1FY2022 asset quality/growth will be key monitorable going forward. We expect well-managed private banks and SBI to continue to outperform their peers due to better capitalisation and improved book quality. We continue to prefer large corporate/ retail private banks and like banks such as HDFC Bank, ICICI Bank, and Axis Bank due to their better earnings and asset-quality visibility. We are selectively positive on PSU banks and like SBI, , and Bank of India among PSBs and see potential for them to gain market share as the situation normalises. Key Risks: Price chart Any delay in economic recovery or significant economic distress may lead to accretion to 180 corporate and SME NPAs along with slowdown in the retail segment may affect earnings. 155 Leaders in Q4FY2021: HDFC Bank, ICICI Bank, SBI, Axis Bank, Kotak Bank, and Bank of 130 Baroda

105 Laggards in Q4FY2021: PNB, AU , and

80 Preferred Picks: 20 21 20 21 - - - - Private banks - ICICI Bank, HDFC Bank, Axis Bank, , and Federal Jun Jun Oct Feb Bank NIFTY 50 NSE FIN SERV PSU Banks - SBI and Bank of Baroda

June 11, 2021 1 Sector Update

Q4FY2021 result snapshot Net Interest Income (Rs Cr) PPoP (Rs Cr) PAT (Rs Cr) Company Q4FY21 Q4FY20 YoY % QoQ % Q4FY21 Q4FY20 YoY % QoQ % Q4FY21 Q4FY20 YoY % QoQ % PSU Banks State Bank of 27,067 22,767 18.9 -6.1 19,700 15,734 25.2 14.1 6,451 3,581 80.1 25.6 India Bank of Baroda 7,107 6,798 4.5 -8.3 6,266 4,922 27.3 12.1 -1,046 507 NA NA Punjab National 6,938 4,678 48.3 -16.5 5,634 3,932 43.3 -11.8 586 -697 NA 15.9 Bank Bank of India 2,936 3,793 -22.6 -21.5 2,094 2,653 -21.0 -26.1 250 -3,571 NA -53.7

Total PSU Banks 44,047 38,036 15.8 -9.4 33,694 27,241 23.7 5.0 6,241 -181 NA -13.8

Private Banks

ICICI Bank 10,431 8,927 16.9 5.2 8,540 7,390 15.6 -3.2 4,403 1,221 260.5 -10.9

Axis Bank 7,555 6,808 11.0 2.5 6,865 5,851 17.3 12.6 2,677 -1,388 NA 139.7

HDFC Bank 17,120 15,203 12.6 4.9 15,533 12,958 19.9 2.3 8,187 6,927 18.2 -6.5

Federal Bank 1,420 1,216 16.8 -1.2 885 959 -7.7 -8.0 478 301 58.6 18.3

IndusInd Bank 3,535 3,231 9.4 3.8 3,129 2,857 9.5 5.6 926 315 193.8 11.5 Kotak Mahindra 3,843 3,560 8.0 -0.8 3,407 2,725 25.0 17.4 1,682 1,267 32.8 -9.2 Bank RBL Bank 906 1,021 -11.3 -0.2 876 752 16.5 8.1 75 114 -34.5 -49.5

City Union Bank 429 420 2.2 -12.4 285 335 -15.0 -37.9 111 -95 NA -34.6 AU Small Finance 656 555 18.2 3.6 374 316 18.4 -57.2 169 122 38.1 -64.7 Bank Total Private 45,894 40,940 12.1 3.5 39,893 34,143 16.8 2.1 18,707 8,785 112.9 0.0 Banks Source: Company, Sharekhan Research

Valuations

Reco/ Target BVPS P/BV Company CMP View Price FY21E FY22E FY21E FY22E PSU Banks

State Bank of India 430 Buy 520 229.4 287.5 1.9 1.5

Bank of Baroda 85 Buy 100 117.6 135.9 0.7 0.6

Punjab National Bank 42 Hold 48 47.3 67.0 0.9 0.6

Bank of India 80 Buy 100 138.0 161.0 0.6 0.5

Private Banks

ICICI Bank 636 Buy 800 239.0 271.0 2.7 2.3

Axis Bank 739 Buy 900 322.0 348.0 2.3 2.1

HDFC Bank 1486 Buy 1810 399.0 453.0 3.7 3.3

Federal Bank 86 Buy 95 87.4 97.3 1.0 0.9

IndusInd Bank 1015 Buy 1340 586.9 661.7 1.7 1.5

Kotak Mahindra Bank 1794 Buy 2130 373.6 422.3 4.8 4.2

RBL Bank 218 Buy 240 224.0 249.0 1.0 0.9

City Union Bank 169 Buy 225 91.4 107.4 1.8 1.6

AU Small Finance 1046 Buy 1350 229.0 292.0 4.6 3.6 Source: Company, Sharekhan Research; UR: Under Review

June 11, 2021 2 Sector Update

Revision in earnings estimates Company Name Change in Reasoning Current Previous Target Estimate Price Reco Reco Strong numbers; Operating results were strong and Axis Bank Fine tuned Buy Buy 900 with capital raise, is placed better Credit growth expected to be muted and the Bank of India Fine tuned corporate segment’s asset quality remains key Hold Hold UR monitorable City Union Bank Fine tuned Mixed performance; Improving Outlook Buy Buy 225 Federal Bank Revised Up Strong numbers; Improving Outlook Buy Buy 95 Strong business growth, asset quality appears HDFC Bank Fine tuned Buy Buy 1810 manageable Operational performance was strong, Asset quality ICICI Bank Revised Up Buy Buy 770 performance improved IndusInd Bank Fine tuned Improving business mix, long term outlook positive Buy Buy 1340 Operational performance was strong, Asset quality Kotak Mahindra Bank Revised Up Buy Buy 2130 performance improved Credit growth expected to be muted and the Fine tuned corporate segment’s asset quality remains key Hold Hold 42 monitorable Asset quality concerns abating, improved RBL Bank Fine tuned Buy Buy UR Capitalization helps Operational performance was strong, Asset quality Revised Up Buy Buy 460 performance improved AU Small Finance Reasonable and in-line performance, Asset quality Maintained Buy Buy 1260 Bank outlook is bright Source: Sharekhan Research

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June 11, 2021 3 Know more about our products and services

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