Business growth, earnings trajectory on a strong footing for Banking and Financial services

Buoyed by strong and continued credit demand from the retail and SME segment coupled with bottoming of asset quality issues, the banking sector witnessed an outperformance compared to the overall index. The banking sector witnessed a continued revival in earnings in Q1FY23. While credit growth continued to remain buoyant and asset quality remained steady, rising yields on treasury impacted operating profit, though lower provision led to a jump in the bottom-line. Lag in passing rate hike led to steady margin vs. our expectation of a sequential increase.

Loan growth for the quarter was at 15.4% YoY, 2.2% QoQ at Rs 114.9 lakh crore, led by retail & MSME segment and lower base of previous fiscal. Resultantly, NII grew at a healthy pace of 13.5% YoY and 2.5% QoQ. C/I ratio inched up 177 bps QoQ from 49.0% to 50.8%, mainly on account of increased business activities, higher tech, marketing and employee cost coupled with lower top line owing to treasury loss. Credit cost (provisions) for the quarter declined both QoQ and YoY due to better asset quality performance and lower slippages. Thus, growth trajectory of earnings continued to increase. However, earnings growth pace moderated QoQ due to a weaker top line. Net profit grew 32.4% YoY but de grew 10% QoQ at Rs 41,242 crore.

Sustained robust credit demand aids operational growth in Q1

For Q1FY23, business momentum was healthy in Q1FY23, attributable to robust demand in the retail and MSME segment. Lower base of the previous year (last year business activities were impacted by the pandemic) also enabled a higher growth trajectory. Loan growth for the quarter came in at 15.4% YoY, 2.2% QoQ at Rs 114.9 lakh crore. Among peers, private banks continued their outperformance with 18% YoY growth while PSU banks also put up a good show. Sectoral data shows the retail segment was up 18.1% YoY and agri credit jumped 13% YoY. Large corporate credit, which had been a drag on overall banking credit growth has started to enter the positive territory and was up 3.3% YoY. Management commentaries and data indicated that improving capex, WC limits have seen better utilisation and, thus, aided credit offtake in this segment. NII grew at a healthy pace of 13.5% YoY and 2.5% QoQ, mainly due to healthy loan growth. Lag in transmission of rate hike led to steady to marginal dip in margins vs. our expectation of sequential rise in NIMs.

Improvement in asset quality keeps credit cost lower

The asset quality trend continued to improve led by healthy recoveries and steady incremental slippages. GNPA ratio for banks in our coverage declined in the range of 6-35 bps with average drop (all banks) at ~10 bps. Even on an absolute basis, GNPA declined ~1% QoQ, 12.1% YoY for the banking sector. The restructured book also declined by an average of 20 bps QoQ, thus indicating overall reduction in stress. In the PSU space, SBI reported an 8 bps QoQ decline in GNPA and 7 bps decline in the r/s book. Bank of Baroda continued to maintain its healthy run on the asset quality front as GNPA was down 35 bps while restructuring also declined ~7 bps QoQ. We believe the asset quality trend should continue to improve as well while management commentaries have also indicated incremental stress will be lower.

Well positioned as beneficiary of sustained economic recovery

Momentum in credit growth and operational performance are expected to continue ahead. In FY23E, credit growth is likely to witness expansion. Firing up unsecured book is expected to aid in initial quarters of FY23E; recovery in corporate credit offtake is expected to revive credit growth from H2FY23. Gradual transmission of rate hike would offset rising competitive intensity on deposits. Deposit mobilisation and, thus, trend in CD ratio to be watched. Overall, we expect continued traction in valuation with preference for lenders with healthy CASA base, higher floating rate asset, adequate PCR and capital. Top picks: SBI, Axis Bank and City Union Bank.

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