The third quarter of FY22 will be characterised by growth gathering pace and uptick in collections with recovery in business activities. Leading financiers have reported 3-8% q-o-q loan growth and y-o-y growth, too, has gained traction. With lower slippages and improving collections/recoveries, we expect improvement in the overall stress pool and credit cost for banks. Behaviour of ECLGS lending pool and restructured portfolio would be key to watch out.
For NBFCs/HFCs, Q3FY22 is likely to see further business traction though the RBI’s notification relating to harmonisation of IRACP norms would likely result in an uptick in GNPAs. However, excess provisioning under ECL framework over IRACP norms is likely to limit rise in credit cost. HFCs are now required to implement minimum 50% LCR; the drag may weigh on their NIMs. For Q3FY22, we estimate 9% y-o-y growth in NII for banks, 2-4% operating profit growth while subsiding credit cost is expected to support >35% earnings growth.
Advanced growth gained momentum q-o-q: Bank credit was up 3.3% q-o-q. Growth was led by retail and commercial banking. Amongst players, AU SFB (up 11% q-o-q), Bandhan Bank (up 9% q-o-q), Bajaj Finance (up 8.6% q-o-q), HDFC Bank and Federal Bank (up 5% q-o-q) witnessed relatively better traction. IDFC FIRST Bank (4% q-o-q) and RBL (3.5%) have broadly sustained momentum. IndusInd (up 3%), and YES Bank (up 2%) lagged peers. Deposit traction q-o-q has moderated a tad to 2-4% q-o-q as overall industry wide growth was 1.7% q-o-q (9.6% y-o-y). As credit growth has outpaced deposit growth, CD ratio has expanded by 100-300bps.
Expect definite improvement in stress pool: With controlled fresh slippages and sustained momentum in recoveries and upgrades, we expect definite improvement in the overall stress pool. Bounce rates in terms of value stayed flat at ~25% for Oct-Nov’21 (27% for Q2FY22, 30% for Q1FY22), better than Mar’20/Mar’21 average of ~27.5%.
Credit cost to subside: Credit cost would likely subside in Q3FY22 compared to H1FY22. Mgmt commentary on the impact of third wave and consequent disruption will be critical. If intensity of third wave rises, normalisation to steady state credit cost will still be some quarters away.
CD ratio expansion, liquidity release and lower slippages to support NIMs: Relatively lower slippages, shift in portfolio mix towards retail, some release of liquidity buffer and CD ratio expansion should support margin profile.
Our preferences: Growth momentum is gaining traction for HDFC Bank, Kotak, Federal and stress is being managed well by SBI, Axis Bank, thereby, improving visibility on earnings trajectory. We stay with them as our preferred picks. Amongst non-banks, we prefer HDFC, Chola, CreditAccess Grameen and Aditya Birla Capital.