Banking, Financial Services and Insurance Sector – First Quarter FY23 Outlook: Earnings expected to be boosted by weak base
Q1FY23 should reflect that asset quality issues have eased for financials and the focus is back on growth. Slippages and the cost of credit will likely remain at least flat or even improve and the stress pool will shrink. After the rise in repo rates, the rise in retail deposit rates by banks lagged behind the rise in lending rates (EBLR and MCLR). We expect the impact on NIMs to be i) relatively more adverse for RBL, IDFC FIRST Bank, IndusInd, Kotak; and (ii) favorable for SBI and Axis.
Soaring G-sec and corporate bond yields and the resulting pressure on Treasuries earnings will likely weigh on earnings. The cost structure is expected to remain elevated and progress growth is expected to maintain momentum of 2-4% QoQ. For Q1FY23, we estimate around 17% year-over-year NII growth for banks, operating profit growth will be flat, while lower cost of credit and weaker base should support growth in earnings. profits > 50%.
Rising lending/deposit rates: After the 90bp rise in repo rates, the rise in bank deposit rates lagged behind the rise in lending rates (EBLR and MCLR). The MCLR was increased by 25 to 65 basis points, with private banks being more aggressive, followed by the SBI. Retail term deposit rates rose across the board, but not in proportion to the rise in repos. Wholesale term deposit rates saw the largest increase of 100 to 170 basis points over a one-year period. Savings rate was only increased by Kotak, IDFCFB, Bandhan and Federal. We expect the impact on NIMs to be i) relatively more adverse for IDFC FIRST Bank (IDFCFB), RBL, IndusInd (IIB), Kotak; ii) favorable for SBI and Axis; iii) for HDFC Bank, IIB and RBL, since 45-50% of the loan portfolio is fixed in nature, the deposit rate increase (retail and wholesale) is likely to outweigh the rate increase loan. The drag of the NIM due to the rise of the CRR must be limited on the excess liquidity.
Treasury earnings will take a hit: G-sec yields have jumped 60bp since March 22 to 7.5% and corporate bond yields around 70bp. We expect this to create pressure on Treasury earnings for banks.
Cost structure will remain elevated: We expect continued investment in franchising, digital spending and focus on retail acquisition to keep cost structure above 20% YoY for banks private, albeit down 1% yoy (on a higher basis).
Growth up to 2-4% qoq: Bank lending is expected to grow >2% qoq />12% year-on-year. Undercover financials are expected to grow 2-4% QoQ. HDFC Bank, Kotak and IDFC FIRST Bank are estimated to outperform their peers with >20% YoY credit growth. IndusInd, YES are likely to gain momentum on a base of less than 14-18% growth. RBL will continue to lag industry average growth.
Stress pool to calm down; ECLGS is not a cause for concern; some slippage from restructuring to transition: Given the contained slippage, we expect an improvement in the overall constraint pool. The dynamics of recoveries and upgrades are seasonally subdued in the first quarter. Given inflationary pressures, rising input costs and surprise benchmark rate hikes, we will remain mindful of the extent of the decline in asset quality. The behavior of the ECLGS pool and the restructured portfolio would be essential to monitor.
NBFC/HFC: On a low basis, Q1FY23 YoY performance could see a sharp uptick in disbursements, increased AUM growth traction and improved CE, which would translate to a better earnings trajectory for NBFC/HFC operating before provisioning. MFI disbursements have been derailed due to revised MFI guidelines and a slowdown is likely in the growth of assets under management. The NBFC/HFC focus on recoveries remains intense in the late tranche to minimize the negative impact of the applicability of the revised Recognition Standards effective September 22. To this extent, while the assets of stage 3 increase seasonally in the first trimester, the magnitude will be contained.
Our preferences and recommendations:
Growth momentum is gaining momentum for HDFC Bank, IIB, and stress is well managed by SBI and Axis Bank, improving visibility on the earnings trajectory. We stick with them as our preferred picks. Among the non-banks, we prefer Mahindra Finance, Aavas and Aditya Birla Capital.