SBI, ICICI Bank to HDFC Bank - Sharekhan has these big takeaway and top picks for investors

SBI, ICICI Bank, HDFC Bank, HDFC Life: The Q2 FY2021 quarter was an encouraging and positive quarter, especially notable in contrast to the tepid Q1 FY2021 quarter. Asset-quality performance improved (helped partly due to the court’s order of standstill on NPA recognition). There were initial apprehensions on NPAs and restructuring pipeline. However, the outlook turns out to be better placed than was initially feared. Sharekhan in fact, likes banks such as HDFC Bank, ICICI Bank and Kotak Mahindra Bank due to their better earnings and asset-quality visibility. 

Preferred Picks:

Pvt Banks - ICICI Bank, HDFC Bank, Kotak Mahindra Bank, AU Small Finance Bank
PSU Banks - SBI
Insurance - HDFC Life Insurance, ICICI Lombard
NBFC - HDFC Ltd, Bajaj Finance 

Most private banks (PBs) and NBFCs reported improvement in collection efficiency, especially in the tail months of Q2 and most banks guided for low restructuring levels. The quarter saw an uptick in NII growth (helped by fall in cost of funds) and incremental normalising of disbursement (especially recovery in retail disbursements), with certain segments reaching pre-COVID levels. Regulatory and government support to SME lending was seen by the Emergency Credit Line Guarantee (ECLG) Scheme, which helped credit delivery to the sector.

On the asset-quality front, slippages were lower (for most banks and NBFCs) mainly due to the court’s order. Management commentary, however, was positive, with most banks guiding for improvement in growth outlook and low/manageable restructuring pipeline. Even seen on the normalised basis (pro forma basis), most PBs highlighted no material deterioration in asset quality.

PSU Banks (PSBs) except SBI (State Bank of India) continue to see challenges on the asset-quality front; and delay in expected resolutions may be a dampener. However, Sharekhan believes Q3 FY2021 may see elevated slippages for players hence they prefer sticking to structurally strong players with high capitalisation and robust book quality. Sharekhan expects normalisation in growth and asset-quality trends may be expected from FY2022E.

Life insurers reported improving month-on-month traction in NBP (improving sequentially) with YTD numbers having near to normalised levels, but improved sequentially. Among business segments, individual protection growth remained strong, while ULIP business traction continued to be weak. For AMCs, the quarter was weak with tepid AUM growth, impacted by oneoff events as well as volatile markets and investor wariness. Robust NBFCs reported stronger-than-expected core earnings due to improved performance in asset growth, margin improvement (helped by easy liquidity regime, lower cost of borrowings), and cost management.

Outlook:

Sharekhan retains their preference for Private Banks, Insurance and AMCs; turn positive on NBFCs space, but remain cautious on PSU banks:

Recent regulatory measures, easy liquidity regime, as well as gradual pickup in economic indicators indicate a steady normalisation pace, which will be significantly positive for growth of BFSI companies and their bottomline. During H1, several corporate and retail banks chose to be conservative rather than be aggressive on growth to protect asset quality and capital optimisation, which may turn to growth from Q4 FY2021 (for stronger players). The recent spate of capital raising and creating liquidity buffers has been positive for balance sheet strengthening. Going forward, as banks and NBFCs shed the extra liquidity; it will provide support to medium term margins. Management commentary indicates a reasonably low restructuring pipeline, which indicates asset-quality outlook may not be materially impacted in the second half of FY2021E.

Valuations:

Most BFSI companies displayed a shift from the risk-off stance towards credit growth to a more proactive growth outlook (in varying degrees) and the commentary too was more positive. Sharekhan has revised their earnings estimates for the sector. They believe collection trends in Q3 and H2 asset quality/growth will be key monitorable going forward. They expect well managed PBs and SBI and strong/high-rated

NBFCs to continue to outperform their peers due to better capitalisation and improved book quality.

Sharekhan continues to prefer large corporate/retail PBs and SBI among PSBs, and see a potential for them to gain market share as the situation normalises. Sharekhan likes banks such as HDFC Bank, ICICI Bank and Kotak Mahindra Bank due to their better earnings and asset-quality visibility. Sharekhan turned positive in the NBFC space and preferred strong players such as HDFC, LIC Housing and Bajaj Finance in the segment. Strong insurers, having healthy business metrics and backed by strong (and stable) bancassurance partnerships, are also attractive.

Key Risks:

A delay in economic recovery or significant economic distress may lead to accretion to corporate and SME NPAs along with slowdown in the retail segment, which will impact earnings.
Leaders in Q2 FY2021: HDFC Bank, ICICI Bank, SBI, Bajaj Finance, HDFC Ltd, Kotak Bank, ICICI Prudential, ICICI Lombard and Federal Bank
Laggards in Q2 FY2021: PNB and Bank of Baroda