SBI, HDFC Bank, ICICI Bank: What Sharekhan said about tailwinds | Explained - Key risks, preferred picks

Q3 FY2021 will be another quarter where the banking and financial sectors will be influenced by regulatory and environmental factors. However, strong pickup in economic activity and encouraging collection efficiencies indicate improving outlook; earlier fears of NPLs at significantly elevated levels (once recognition is allowed) have been abated. Even though overall credit growth has been weak on system levels, at 5% yoy, larger and well-placed banks (such as SBI or State Bank of India, HDFC Bank, and ICICI Bank) are expected to report better advances growth, indicating market share gain.

Q3 FY2021 will be another quarter where the banking and financial sectors will be influenced by regulatory and environmental factors. However, strong pickup in economic activity and encouraging collection efficiencies indicate improving outlook; earlier fears of NPLs at significantly elevated levels (once recognition is allowed) have been abated. Even though overall credit growth has been weak on system levels, at 5% yoy, larger and well-placed banks (such as SBI or State Bank of India, HDFC Bank, and ICICI Bank) are expected to report better advances growth, indicating market share gain.

The economy is showing signs of gradual return to recovery, which augurs well for long-term demand outlook. However, potential risks exist to economic recovery and global challenges (due to the pandemic) are also present. Sharekhan believes that the regulatory measures have successfully cushioned the financial system on the earnings front (especially on the asset-quality recognition part) and expect the gradual return to normalised business traction to be positive for BFSI companies. During Q3, Sharekhan expects stronger private banks to show sequentially better growth, helped by healthy capital levels, which will provide support to margins. The recent spate of capital raising will be positive for balance sheet strengthening, and gradually reducing liquidity buffers will be positive support for margins and medium term return ratios.

Sharekhan expects GNPAs to show sequential improvement, but resolutions would be negligible. Sharekhan believes that the real asset-quality picture would emerge in the second half of FY2021 only. Sharekhan hopes to see more clarity and granular information sharing on the book as lenders will share their strategy to align their portfolio and work with borrowers to recover loans.

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For insurance companies, new business growth and premium collections have picked up in monthly collection figures. Sharekhan is positive for the long term in the insurance sector. For AMCs, Sharekhan expects near-term challenges in terms of tepid economic growth to weigh upon retail collections growth. Agriculture is likely to be a relatively bright spot.

Valuation:

Sharekhan prefers large corporate/retail private banks and SBI among PSBs and see potential for them to gain market share as the situation normalises. Sharekhan believes that the NBFC space has become attractive and prefers strong players such as HDFC, LT Finance, and Bajaj Finance in the segment. Strong insurers, having healthy business metrics and backed by strong (and stable) bancassurance partnerships, also continue to be attractive.

Key risks:

Delay in economic recovery/prolonged economic distress can lead to accretion to corporate and SME NPA and slowdown in the retail segment, which may impact earnings.
Leaders for Q2FY2021: HDFC Bank, HDFC Life, HDFC Ltd., ICICI Bank, and SBI
Laggards for Q2FY2021: Nippon AMC, BOI, and PNB

Preferred Picks:

Private banks: ICICI Bank, HDFC Bank, and Kotak Mahindra Bank

NBFCs and SFBs: Bajaj Finance, HDFC, Cholamandalam Investment, and AU Small Finance Bank

Insurance: HDFC Life, ICICI Prudential, and ICICI Lombard

Public sector bank: SBI

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