Second Covid-19 wave and lockdown lesser disruptors for banking sector

Valuations may not correct much here on as Street factors for less than 10 per cent growth for FY22

Fresh lockdowns are being imposed in parts of the country because of the second wave of the Covid-19 pandemic. However, it may be less painful for bankers this time around.

For one, a significant part of operations has been recalibrated and bankers too have embraced new ideas such as faceless customer interactions and work from home to ensure seamless workflow. On the business front, with the fear of elevated bad loans gradually easing and moratorium not being very detrimental as envisaged, the banking sector is bracing for some normalcy in FY22. Analysts are factoring in 10-12 per cent loan growth in FY22. While this is lower than the five-year average of 15.5 per cent, estimates for FY22 are about 400 basis points (bps) higher than FY21. Housing and auto loans are expected to lead growth in the retail space, while a moderate return in demand for corporate term loans is seen likely.

The relief, though, could be on the asset quality side. With the proforma non-performing assets (NPAs) higher by 100-150 bps than reported numbers, the base for bad loans will be reset in Q4 as the Supreme Court has vacated the stay on asset classification. Hence, in FY22, the probability of fresh asset quality stress isn’t high, going by commentary from banks. Based on analyst estimates, banks have provided for 50-60 per cent of the proforma stress till Q3. “In Q4, banks will have to report actual NPAs, which could lead to some margin compression and an increase in slippages. However, we expect better clarity on the asset quality front with actual recognition resulting in some write back in provisions for banks like ICICI Bank having relatively higher provision coverage,” say analysts at Axis Securities. Therefore, the spillover to FY22 could be limited.

Valuations may stabilise for bank stocks, though the pace of stabilisation may be uneven. For instance, analysts at ICICI Securities note that stocks such as Axis Bank, State Bank of India (SBI), Bandhan Bank, City Union Bank, and Federal Bank, which trade at 10-15 per cent discount to historical averages, may take a while to recover. With higher exposure to small and medium enterprises (SMEs) and microfinance loans, slower economic recovery due to a likely lockdown may dent their near-term collection efficiencies. On the other hand, they expect earnings delivery to be on the guided lines for IndusInd Bank, though the risk of de-rating is likely for YES Bank, RBL Bank, and AU Small Finance Bank, they note.

With the Street continuing to favour sector leaders, smaller players may have to prove resilience to win favour.