BFSI: Q3FY22 Overview – Growth Expected to Accelerate

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Improved overall stress pool expected; NII growth of 9% YoY for banks estimated

The third quarter of fiscal year 22 will be characterized by an acceleration of growth and a recovery in inflows with a resumption of commercial activities. Major financiers reported loan growth of 3-8% year-over-year, and year-over-year growth also picked up momentum. With lower slippages and improved collections/collections, we expect the overall stress pool and cost of credit for banks to improve. The behavior of the ECLGS loan pool and the restructured portfolio would be critical to monitor.

For NBFCs/HFCs, the third quarter of FY22 should see greater commercial traction, although the RBI’s notification of the harmonization of IRACP standards would likely result in a slight increase in GNPAs. However, excessive provisioning under ECL compared to IRACP standards is likely to limit the increase in the cost of credit. HFCs are now required to implement a minimum of 50% LCR; drag can weigh on their NIMs. For Q3FY22, we estimate 9% YoY NII growth for banks, 2-4% growth in operating profit, while lower cost of credit should support profit growth >35% .

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Advanced growth accelerated quarter-on-quarter: bank lending increased by 3.3% quarter-on-quarter. Growth was driven by retail banking and commercial banking. Among the players, AU SFB (+11% q/q), Bandhan Bank (+9% q/q), Bajaj Finance (+8.6% q/q), HDFC Bank and Federal Bank (+5% q/q t) experienced relatively better traction. IDFC FIRST Bank (4% q/q) and RBL (3.5%) have generally sustained momentum. IndusInd (+3%) and YES Bank (+2%) lagged their peers. qoq deposit pull moderated a bit at 2-4% qoq, with overall industry growth at 1.7% qoq (9.6% yoy). As credit growth outpaced deposit growth, the CD ratio increased by 100 to 300 basis points.

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Expect Much Improved Constraint Pool: With new controlled slippages and continued momentum in recoveries and upgrades, we expect a significant improvement in the overall Constraint Pool. Rebound rates in value terms remained steady at ~25% for Oct-Nov 21 (27% for Q2FY22, 30% for Q1FY22), better than the Mar 20/Mar 21 average of ~27.5%.

Lower cost of credit: The cost of credit would likely decrease in Q3FY22 compared to H1FY22. Management’s feedback on the impact of the third wave and resulting disruption will be critical. If the intensity of the third wave increases, the normalization of the cost of credit to the steady state will still be a few quarters away.

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CD ratio expansion, liquidity release and lower slippages to support NIMs: Relatively lower slippages, shift in portfolio mix towards retail, some liquidity cushion release and CD ratio expansion should support the margin profile.

Our preferences: Growth momentum is gaining ground for HDFC Bank, Kotak, Federal and stress is well managed by SBI, Axis Bank, improving visibility on the earnings trajectory. We stick with them as our preferred picks. Among the non-banks, we prefer HDFC, Chola, CreditAccess Grameen and Aditya Birla Capital.

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