Banks may strengthen balance sheets by making healthy provisions but declining interest rates along with higher liquidity are likely to keep margins under pressure, say experts.
The coronavirus pandemic has deferred the recovery of Indian banks as the sector's earnings are likely to remain muted due to the outbreak of coronavirus and its impact on growth and asset quality.
Brokerages say banks may strengthen their balance sheets by making healthy provisions. However, declining interest rates along with higher liquidity on the balance sheets are likely to keep margins under pressure.
"We believe the proportion of loans under moratorium would decline gradually. Thus, the collection efficiency trend is an important near-term metric to assess the banking system’s health. Overall, we estimate our banking coverage universe to deliver 20 percent growth in PPoP (pre-provision operating profit) and 4 percent PAT growth in Q1FY21," brokerage firm Motilal Oswal said in a note.
Motilal's estimates show private banks may report PPoP growth of nearly 21 percent year-on-year (YoY), while PAT should grow 4 percent YoY.
Earnings of public sector banks (PSBs) may continue to remain weak.
"The dreadful impact of COVID-19, sluggish loan growth due to merger integration, a higher proportion of moratorium and delay in the resolution of NCLT accounts are additional earning dampeners. PSBs are expected to deliver NII growth of 5 percent YoY and a PAT growth of nearly 3 percent YoY to Rs 3,120 crore. We expect PSBs’ PPoP to grow nearly 19 percent YoY," Motilal Oswal said.
Time to avoid the sector?
Banking and financial stocks were hammered the most when the lockdown started in India. The Reserve Bank of India's announcement of moratorium also hit the BFSI stock price, as putting off of loan payments increased uncertainty about asset quality.
Experts advise is to be selective in the sector as some large private banks may withstand the pressure.
"Investors should not completely avoid the entire sector as every sector has few operationally well-managed companies and in an uncertain environment, investors can buy them at a lower valuation," said Jaikishan Parmar, Senior Equity Research Analyst, Angel Broking.
The ability to raise sufficient liquidity at a competitive rate, capacity to absorb expected provision for bad loans and adequate capital adequacy will determine the performance of the bank going forward, he said.
"Recently, HDFC Bank has reported a provisional number for Q1FY21, which clearly shows the polarisation of the deposit towards a large bank. Bandhan And Bajaj Finance have lifted sentiment in the BFSI segment as they have reported lower moratorium versus Q4FY20," Parmar said.
Vinod Nair, Head of Research at Geojit Financial Services, also favours being selective in the financial space.
"We would like to be selective in the banking and NBFC space as concerns relating to asset quality is high depending on the segment, risk management and growth analysis of a company," said Nair.
Nair is of the view that in NBFCs, excluding gold-loan companies, NPA (non-performing assets) concerns would be high since they lend more to weaker sections and wholesale funding.
For PSU banks, Nair says non-interest income will be higher due to treasury gains as the 10-year yield corrected by 25-30 bps in Q1FY21.
"Stress could emerge from self-employed, MSME and low-rated corporate segment category, where NPAs are expected to shoot up. Q1FY21 business data from few private sector players indicate there is an increase in advances, deposits and collections, which is a positive," Nair said.
There are some positives for the banks, especially the large private ones.
The decreasing trend in moratorium indicates that collections are improving. The majority of private sector players are raising capital or have plans to raise capital in the near-term to strengthen their market share.
Nirali Shah, Senior Research Analyst at Samco Securities, is of the view that the leading experienced private players will be better suited to ride the storm compared to public sector banks, which will undergo more pain.
Shah said banks were going all out to raise capital.
"They are raising such large amounts of money because they expect their asset quality to decline going forward. So, in order to cushion themselves from adverse credit losses, banks are being proactive and raising funds in advance. However, this entire situation is causing dilution in stake for the existing shareholders," Shah said.
Stocks worth looking at
Nair of Geojit Financial Services prefers ICICI Bank as he believes the bank's strong balance sheet and focus on digital transformation should support the valuation.
"This is solely on the basis of their history in better risk management and portfolio diversity along with their top-notch creditworthiness, which makes them perfect candidates to raise funds during these uncertain times at much lower cost," Shah said.
Motilal Oswal Financial Services has 'buy' calls on ICICI Bank, HDFC Bank and State Bank of India.
"We expect ICICI Bank to deliver RoA/RoE of 1.2 percent/11.9 percent by FY22E. Adjusted for subsidiaries, the standalone bank trades at 1.4 times FY22E ABV," said Motilal Oswal.
For HDFC Bank, the brokerage said it estimates loan book/PAT to deliver CAGR of 15 percent each over FY20-22E. However, management succession remains a big event to watch for.
For State Bank of India, Motilal estimates FY22E RoA/RoE of 0.5 percent/8.9 percent. Adjusted for subs, the bank's standalone trades at 0.4 times FY22E ABV, Motilal Oswal said.Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.