Best Bank And NBFC Stocks To Buy & Sell Now: HDFC Sec Research Report

Banks and NBFCs

A washout quarter

COVID-19 disrupted real economic activity in April and May. These disruptions, coupled with an already weak credit demand, has impacted asset growth, we believe. On the funding side, large private banks (and select NBFCs and HFCs within our coverage) are expected to have fared well. Even though collections were impacted, the standstill classification benefit/moratorium would have optically limited slippages and GNPAs. Thus, the true picture will emerge only in 2HFY21E. However, elevated provisions are likely to persist (denting earnings) for some lenders as they may have chosen to fortify their balance sheets.

Our broad thesis remains unchanged. We expect the banking space to witness increased polarisation. Consequently, larger banks with sufficient capital, strong granular liability franchises and a reasonable asset quality track record are expected to emerge stronger. Our top picks are ICICIBC (SoTP of Rs 456), AXSB (SoTP of Rs 565) and CUBK (TP of Rs 172). CIFC remains our top pick in the NBFC space, given its (1) management pedigree, (2) diversified portfolio, (3) easy access to funds and a higher proportion of bank borrowings, (4) more than sufficient capital post the recent fund raise, and (5) historical asset quality trends.

What we will watch out for: (1) disbursals under NCGTC scheme, (2) COVID-19 related provisions and changes in PCR, (3) details on the moratorium extended, and (4) deposits accretion (for banks) and availability of funds (for NBFCs and HFCs).

Banks

 We expect slower credit growth across our coverage. Fresh disbursals in most loan segments would have been limited. The trends in non-food credit growth until May-20 (6.8% YoY vs. 11.4% YoY in May-19) substantiate our take. A significant proportion of fresh lending in the quarter have occurred in the following segments- agri loans, gold loans, and MSME loans under the NCGTC scheme.

 On the deposits front, we expect that large private banks (ICICIBC, AXSB and KMB) and SBIN (within our coverage) would have seen good deposit traction (faster growth vs. the sector).

 We expect banks such as ICICIBC and AXSB to report stable NIMs (QoQ). Although interest rates have trended downwards, the fall in yields will be cushioned by lower slippages. Further, these banks are likely to see a fall in their CoF. KMB is expected to see higher NIMs, given that it cut its SA rates sharply in April. Banks such as RBK, IIB, KVB, CUBK and DCBB may see NIMs compress due to CoF stickiness. Over FY21E, we expect most banks within our coverage to see NIM compression (refer to our report ‘NIM Compression on the Cards’).

 Banks such as AXSB, CUBK, and DCBB, which made relatively higher COVID-19 related provisions in 4QFY20, are expected to report lower provisions (QoQ). However, we expect IIB (provided 5% on overdue accounts), FB, RBK and SBIN to report higher provisions. Stake sale gains permit SBIN and ICICIBC to make higher provisions. We will watch for incremental COVID-19 related provisions.

 Most banks are likely to see optically stable asset quality (QoQ). The standstill benefit classification is likely to limit slippages unless banks voluntarily classify an account as a non-performing one. Recoveries and upgrades will also be impacted.

 While the manner in which banks report moratorium metrics lacks standardisation, we expect the proportion of banks’ loans under moratorium to have reduced by June-20. Repayments are likely to have improved after lockdown restrictions were eased. We will watch for commentary on this parameter.

NBFCs and HFCs

 We believe that our coverage is likely to see YoY AUM growth slow further. Disbursals for the quarter are expected to see a sharp decline (YoY and QoQ) due to limited business activity during April and May. June is likely to have contributed to the majority of the quarter’s disbursals across the board.

 Tractors and two-wheelers are likely to have constituted a greater proportion of disbursals for vehicle financiers under our coverage.

 On the borrowings front, within our coverage, we expect CIFC and LICHF to have had access to ample funds, in line with previous trends. We also expect our coverage companies to continue to report an increase in the proportion of bank borrowings.

 NIMs are expected to remain stable for NBFCs within our coverage the liquidity drag would compensate the effect of a fall in CoF. LICHF’s NIMs may rise slightly (due to a fall in CoF), after the significant compression seen in 4QFY20.

 We expect provisions to remain elevated in 1Q for our coverage universe. We will watch for incremental COVID-19 related provisions.

 Like banks, we expect NBFCs and HFCs to see optically stable asset quality. They would have also seen a decrease in the proportion of loans under moratorium in June 2020. Collection efficiency is likely to have improved after lockdown restrictions were eased. We will watch for commentary on this parameter.