Q4FY2021 was a strong quarter with most banks reporting healthy earnings growth, an improving growth and asset-quality outlook with manageable NPL performance. For Sharekhan’s coverage universe, aggregate PAT of private banks grew by 112% y-o-y and PSU banks posted healthy PAT performance (Q4FY2020 aggregate was net loss). For the quarter, slippages remained elevated, restructuring increased, credit cost rose, and profitability was impacted mainly as banks reverted to IRAC norms (normalised) based NPA recognition and, hence, was along expected lines. Private Banks’ advances grew faster than the system and resulted in continued market share gains. Coupled with strong deposit growth, notably low-cost CASA deposits and reduced cost of funds led to better margins.

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Leaders in Q4FY2021: HDFC Bank, ICICI Bank, SBI, Axis Bank, Kotak Bank, and Bank of Baroda

Laggards in Q4FY2021: PNB, AU Small Finance Bank, and City Union Bank

Preferred Picks:

Private Banks : ICICI Bank, HDFC Bank, Axis Bank, Kotak Mahindra Bank, and Federal Bank

PSU Banks: SBI and Bank of Baroda

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Even compared on a proforma basis, most private banks performed well and reported improvement (even if only a slight one) and manageable slippages and credit cost. Hence, the Reported GNPA as compared to proforma GNPA for Private Banks was within 50-200 bps range for most private banks, excluding some new-age banks with relatively high exposure to micro and SME loan segments. PSU banks also posted decent earnings, but advances growth remained tepid due to capital constraints and credit cost is also at elevated levels. SBI was easily the best performer among PSU banks and continued to see improved asset-quality performance along with gaining market share on the advances front. PSU banks and micro-lenders reported a higher restructured book, which was largely within the manageable range. Gap of proforma versus reported GNPAs was higher for PSU banks and small-ticket/micro-loan players.

Sharekhan expects PSB’s margins to be range bound due to credit cost outlook, which is yet to regain clarity and growth outlook is still weak. However, any progress on recoveries from IBC/NCLT would be a re-rating trigger going ahead. Sharekhan believes low interest rates, encouraging vaccination progress, and recovery in economic activity are potent positives for the financial sector. We prefer structurally strong players with high capitalisation and robust book quality. The earlier apprehension regarding an unwieldy restructuring pipeline was ameliorated through proactive provisions and improving collections. Sharekhan believes asset-quality outlook has improved for the banking sector. Management commentary is also positive, albeit tempered with caution across the board, with most banks guiding for improvement in growth outlook in H2FY2022E and a low/manageable restructuring pipeline.

Key Risks for the Banking Sector:

Any delay in economic recovery or significant economic distress may lead to accretion to corporate and SME NPAs along with slowdown in the retail segment may affect earnings