PL Sector Report - Banks - Apr-Jun’23 Earnings Preview – Weak quarter due to NIM fall, rise in provisions

Banks - Gaurav Jani - Research Analyst, Prabhudas Lilladher Pvt Ltd

Apr-Jun’23 Earnings Preview – Weak quarter due to NIM fall, rise in provisions

Banks in our coverage are expected to see a weak quarter as core earnings could fall by 5.8% QoQ to Rs512bn (vs +16.6% QoQ in Q4’23), mainly driven by lower NIM and higher provisions. Loan growth might come in at 2.1% QoQ (3.8% in Q3FY23), while deposit accretion could be tad better at +2.3% QoQ (6.2% last quarter). We expect NIM to decline by 8bps QoQ (flat in Q4’23) to 3.84%. HDFCB and AXSB may see lower NIM contraction. Due to seasonality, fees could fall by 7.7% QoQ to Rs282bn which would be offset by decrease in opex by 4.4% to Rs719bn. Core PPoP may come in at Rs797bn, -3.1% QoQ and 22.1% YoY. HDFCB, AXSB, SBI and FB might perform better on core PPoP. Slippage ratio might rise by 20bps QoQ to 1.5% as Q1 usually sees agri delinquencies. Hence, provisions may rise by 5bps QoQ to 59bps. Banks’ PAT is expected to be Rs522bn (-7.1% QoQ). Among our coverage universe we prefer HDFCB, AXSB and DCBB.

♦ System loan growth at 16%; deposit accretion improving: System credit in May’23 grew by +15.6% YoY (peak 17% in Oct’22). Services/retail remain key growth drivers (+21.4% & +19.2% YoY). Services credit growth is largely attributable to NBFCs and trade while retail credit is being led by housing, unsecured credit, vehicle loans and credit cards. Industrial credit growth that was slowing came in at 6.0% YoY and since last 4 months it is sustaining between 6.0-7.0% (peak 13.6% in Oct’22). Momentum in agri continues (+16.0% YoY). Coverage banks are expected to grow by 2.1% QoQ and 16.7% YoY compared to ~16% for system. Deposits are gathering momentum as deposit rates have been hiked. As at 23rd June’23, deposits grew by 12.1% YoY compared to 9.8% in Mar’23. CASA is expected to decline by 1.1% QoQ while CASA ratio could fall QoQ from 42.7% to 41.3%.

♦ Margins could start to decline; we see 8bps fall: As repo rate hikes have been paused, deposit cost increase is catching up. For our coverage banks, yield on assets are expected to improve by 23bps QoQ while cost of funds could rise by 34bps. Hence NIM is expected to fall by 8bps QoQ to 3.84%; last quarter NIM was flat QoQ at 3.93%. As a result, NII decline at -1.2% QoQ could lag loan growth (+2.1% QoQ). First quarter being seasonally weak could result is fee income decline of 7.7% QoQ to Rs282bn (mainly led by PSU banks) which would be offset a 4.4% decline in opex to Rs718bn. Core PPoP would come in at Rs797bn, -3.1% QoQ and +22.1% YoY.

♦Asset quality might see a blip: Asset quality is expected to see a slight blip and slippage ratio could rise from 1.26% to 1.46%, driven by agri slippages especially in case of SBI and HDFCB. Recoveries and upgrades might remain healthy that would keep GNPA ratio controlled for coverage banks at 2.45% (last quarter 2.48%). Provisions for our banks could increase by 5bps QoQ to 0.59%, mainly led by higher slippages and normalization in NPA provisioning.

♦Core profitability to fall QoQ: Core PAT for our coverage banks is expected to fall by 5.8% QoQ to Rs512bn led by lower margins, fees and increase in provisions. PAT is expected to be at Rs522bn (-7.1% QoQ). HDFCB, IIB, SBI and DCBB could see a lower fall in core PAT.

♦ Large private banks could see loan growth of 1.7% QoQ and 17.7% YoY (vs 2.5% QoQ/16% YoY for the system). Deposit growth is expected to be 1.9% QoQ/13.6% YoY (last quarter 7.7%/16.3%). We see NII fall of 0.5% QoQ, as NIM could decline QoQ since deposit rates are catching up. Hence, NIM might come in at 4.50%, lower by 6bps QoQ, given deposit rate hikes across banks were much steeper in H2FY23. Fees may slightly blip by 1.9% QoQ which would partly be neutralized by flat opex QoQ. Core PPoP may come in at Rs488bn (-1.8% QoQ). Provisions would largely be stable QoQ at 0.7%; core PAT could be Rs317bn (-5.0% QoQ/26.7% YoY).

♦ Public Sector Banks – Coverage PSU banks could see tad better loan growth than private peers at 2.4% QoQ and 16.1% YoY, although NII growth may be -2.0% QoQ and 27.1% YoY. NIMs set to decline by 12bps QoQ (last quarter +7bps) to 3.26%. Driven by lower NII growth and seasonally weaker fees, core PPoP might decline by 5.3% QoQ to Rs292bn. Asset quality expected to see a blip; as slippages could emanate from agri. Provisions might come in at 47bps. Core PAT is expected to be at Rs187bn (-6.8% QoQ).

♦ Mid-cap Banks – Our coverage mid-cap banks could see loan growth of 3.5% QoQ (higher than large banks), while NII growth would be 0.4% QoQ. Loan growth would be largely led by FB (+21% YoY). NIM might see a 6bps decline to 3.46%. Core PPoP at Rs18.4bn could decline by 7.8% QoQ. Mid-cap bank’s asset quality could improve as slippage ratio might decline QoQ to 1.7% from 2.0% although provisions could rise QoQ from 55bps to 61bps as provisions could normalize for FB. Core PAT may come in at Rs10.45bn (-4.4% QoQ).

♣ Top Picks:

♦ HDFC Bank – Overhang of the merger is over and HDFCB could see better NII trajectory to peers as ~50%+ of the portfolio is fixed rate. Although loan growth at 1.0% QoQ was muted for the quarter, retail loan mix is improving as retail grew by 4.0% QoQ. NIM fall of 3bps QoQ would be lower for HDFCB compared to our universe (-8bps). Valuation at 2.3x on core FY25E ABV suggests a discount of 5% to ICICIB. We maintain ‘BUY’ and raise TP from Rs1,925 to Rs2,025 due to earnings upgrade of 1.5% for FY24/25E and recent up-move in HDFC Life.

♦ Axis Bank – Due to CITI acquisition last quarter, NII was depressed since it was recognized only for a month resulting in 20bps QoQ decline in NIM to 4.0%. We expect this to normalize and see lower reduction in NIM by 3bps (vs 8bps for coverage banks) to 3.99%. Hence core PPoP could be flat QoQ (-3.1% for our universe). While provisions may rise from 15bps to 50bps QoQ, AXSB could create contingent buffers. Discount to ICICIB has slightly increased to 26% (range 20-22%) and valuation is attractive at 1.8x on FY25E ABV. Retain ‘BUY’ at TP of Rs1140.

♦ DCB Bank – Loan growth trajectory has been healthy and could come in at 3.4% QoQ and 19.0% YoY, while NIM could decline by 6bps QoQ. Core PAT might fall by 1.6% QoQ (-4.4% for mid-cap banks). Net slippages materially declined (FY21-2.3%, FY22-1.1%, 9MFY23 - 0.14%) due to stronger recoveries. Hence, GNPA and NNPA reduced from a peak of 4.9%/2.8% in Q1FY22 to 3.2%/1.0% in Q4FY23. Valuation is compelling at 0.7x on FY25E ABV. Reiterate ‘BUY’ with TP at Rs150.

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