Business updates released for financiers in Q4FY21 suggest revived business growth momentum, both on credit (3-6% q-o-q growth) as well as deposit front (5-10%). However, key to watch out for in Q4FY21 earnings would be: (i) Actual stress tagging and reported GNPAs – though not much deviation is expected from pro forma NPAs; (ii) provisioning build-up (both on incremental stress and contingency, if any); (iii) narrative on Covid second wave impact – financiers will be conservative in not utilising the contingency buffer; and (iv) how benefit of funding cost and portfolio mix shift offsets interest on interest reversal and lower CD ratio.
Uptick in credit growth, stable NIMs, seasonally strong fee income in Q4 will support operating profit growth (>5%/20% q-o-q/y-o-y growth ex-YES). Credit cost will be the key determinant for earnings driver – on a lower base in Q4FY20, we expect >60% earnings growth for banks ex-YES.
Actual stress tagging in Q4FY21: With interim relief on NPA tagging being vacated, we will see actual stress recognition in Q4FY21. We expect incremental slippages (non-annualised) of 1.0-2.5% (over 9MFY21 pro forma) primarily flowing in unsecure retail, bus operator segments etc., thereby driving NPAs sequentially up. Corporate stress recognition, that was almost non-existent in 9MFY21, might resurface in Q4FY21 (few legacy accounts).
Credit cost unlikely to throw any negative surprise: Financiers have made upfront specific provisioning on pro forma stress for 9MFY21. Specific coverage with standard + Covid-related buffer seemed sufficient for the existing stress pool lowering risk of credit cost volatility. However, resurgence of Covid and imposition of restrictions do pose a risk of activity disruption and lower collections.
HFCs/NBFCs: Q4 is seasonally strong both on sourcing as well as collections. However, trend would be divergent across product categories: home loans to lead, CV, cab aggregators, wholesale real estate to drag. Given NBFCs/HFCs have relatively higher proportion of SMA-2/3 pool in Q3FY21, endeavour to manage stress pool sequentially lower will be key to watch out.
Our preferences and recommendations: Stress is being managed well by Axis Bank, SBI, HDFC Bank and Federal Bank. Also, sustainability of operating profit for these banks with new normal credit cost trajectory will drive re-rating for these names. We stay with them as our preferred picks. Amongst non-banks, we prefer HDFC, Piramal, Repco, MMFS and PFC.