Earth shakes when giants walk: So is the case with large Indian Banks?
In equity markets (or even otherwise in life), ‘today’ is an extension of ‘yesterday’ and ‘tomorrow’ is an extension of today. The scoreboard keeps ticking. Technical analysts call it a trend. However, when the market perception about ‘tomorrow’ changes; a new chapter begins. Technical analysts call it a trend reversal.
Ever since the FM has announced the Budget 2021-22, the market perception about future earnings seems to have changed dramatically. Experts, analysts and investors are now hopeful that a strong upswing in corporate earnings is around the corner, and Q3FY21 numbers reinforce this belief. Stock price performance suggests that the re-rating could well be already underway.
Skeptics, on the other hand believe, the earnings growth is merely a reflection of the low base that resulted from performance during the pandemic.
If India was to experience a strong economic recovery indeed, as anticipated, it’s only logical to believe that cyclical sectors may be at the forefront of this recovery. Banking being the largest cyclical sector which is often termed as the proxy on country’s economic growth is passing through a crucial phase.
The Q3FY21 earnings session for banks started with a cautious commentary by RBI. The RBI’s latest Financial Stability Report (FSR) has warned against the possibility of sharp impairment in the asset quality which might take the gross NPAs (Non-Performing Assets) of banks to 13.5% by September 2021, on the back of COVID-19.
Credit growth of leading Indian banks has been much higher than the industry average. Also, they are likely to maintain their asset quality above the average. According to RBI data, the average monthly credit growth has been 5.8% in Q3FY21. But this has been a trend for a while; so what has changed, you might wonder. The only change is they are entering the so called ‘phase of economic recovery and earnings upswing’ without much baggage of the past and thus this divergence may grow bigger.
Q3FY21 report card…
(Source: Disclosures of respective banks)
India’s six prominent banks account for ~60% of overall bank sector lending. And the same set of banks also has a strong CASA (Current Account Savings Account) base.
(Source: Company data, Ventura Securities)
Granular evaluation suggests that the focus areas for growth differ from one bank to another. For instance, the corporate book makes up 46% of Bank of Baroda’s (BoB’s) domestic loan book. On the other hand, retail loans account for 65.6% of ICICI Bank’s loan portfolio.
While most banks have reported a healthy double-digit growth on their retail advances, a few others went ultra conservative. As you may be aware, IDBI Bank has been hoping to come out of RBI’s prompt corrective action classification and thus, seems to be lending ultra-conservatively. In Q3FY21, it grew its retail book only; the other loan categories registered a fall on a Y-o-Y basis.
IDFC First Bank is no different. While its overall advances have been around Rs 1 lakh crore for the past few quarters, the weightage of wholesale book has been falling consistently. Now if one concludes that the book isn’t growing, one could be missing a vital piece of information—IDFC First endevours to become a prominent retail bank in future. In this case, will Price-to-Book (P/B) be the right valuation parameter until the bank is completely done with its transition?
IDFC First: retail focus…
(Source: Company records)
The trend in digital adoption is strong amongst leading banks.
HDFC Bank acquired 20 lakh new depositors—an 18% Y-o-Y and 9% Q-o-Q growth. In the quarter gone by, HDFC Bank launched an AIML tool—Next Best Action—to improve the engagement of the staff with customers for faster conversions. This is expected to help the country’s most profitable bank maximize the return on effort of its human resources. The bank aims to transform branches into ‘financial solution supermarkets’.
The second largest private sector lender, ICICI Bank, witnessed a 60% jump in transaction volumes on its mobile banking platform and it obtained 59% of new deposits through digital channels.
The country’s largest lender, SBI, has been going neck-to-neck with its private sector counterparts in digital transformation. The bank acquired two in every five borrowers and three in every five new depositors through digital means in Q3FY21.
SBI’s Chairman, Dinesh Kumar Khara, has also hinted at making analytics an enabler to fuel the next growth phase. This in itself is a big guidance considering SBI’s reach. The customer base of SBI is ~44.9 crore. It is also eying unlocking value from its subsidiary businesses. Adoption of YONO—SBI’s banking app—has gone up by leaps and bounds in Q3FY21 with new registrations touching nearly 42 lakh which is 12.8% of cumulative registrations.
Even a PSU Bank like BoB, which so far lagged behind its peers in digital transformation, is now focusing on new-age banking. It on-boarded 51.85 lakh new users through its digital platform in Q3FY21. BoB recently launched Whatsapp Banking as well.
Asset quality and capital adequacy
The Provision Coverage Ratio (PCR) of leading private sector banks and large PSU banks in Q3FY21 was higher than that in Q3FY20. SBI and Bank of Baroda reported a PCR of 90.2% and 85.5% while the PCR of Axis Bank and ICICI Bank were 91% and 86%, respectively. Higher PCR indicates that the lenders have adequately provided for the existing NPAs and in case there are any recoveries in future, they might have some windfalls as well.
There’s been a significant reduction in the credit cost of large public sector banks. For instance, against 3.88% in Q3FY20, the credit cost of Bank of Baroda declined to 1.16% in the quarter gone by. In the case of SBI, credit cost shrank to 0.38% in Q3FY21 from 1.46% in the corresponding quarter of the last fiscal. Even after considering the proforma slippages—advances which could have turned NPAs if they were not under the standstill clause of NPA recognition imposed by the Honorable Supreme Court—credit cost of SBI is on a downward trajectory.
Capital Adequacy of a bank suggests how well prepared it is to absorb shocks and clock growth. Barring Bank of Baroda, all other banks seem to have already geared up for the cyclical growth that markets have been awaiting for a long time now.
In a nutshell
Banks with higher PCR, greater capital adequacy, better digital preparedness and strong deposit franchises may benefit from the economic recovery, if and when it happens. The coming quarter might tell us whether earnings growth can sustain.
Please Note (read as a disclaimer): None of the stocks discussed in the article are recommendations to buy, hold or sell. This could just be the starting point for deeper analysis that you might want to carry out on your own. You may also take professional help as you feel appropriate.
If you are investing in any family run company, besides governance, you may also want to take stock of significant developments in the lives of the promoters. Sometimes, their personal life can overshadow market sentiments. Also pay attention to issues such as pledging of shares by the promoter group and the working capital.
You may also like to read: In conversation with Shridatta Bhandwaldar
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