After an eventful 3Q, 4QFY18 was full of surprises as the regulator continued to push for accelerated NPA recognition. Corporate leaders are expected to be saddled with elevated slippages on the back of RBI’s circular (of 12-Feb-18) terminating various restructuring dispensations such as 5/25, SDR and S4A. However, the allowance of spreading MTM provisions over 1HFY19 and the drop in bond yields (after an initial spike during the qtr) may provide some respite. Though the progress on NCLT resolutions is encouraging, the lack of execution has kept lenders waiting.
On the other hand, retail-tilted private banks are expected to report robust growth and stable NIMs. RBI’s dispensation on MSME loans could be utilized (esp. KVB) to keep asset quality under check. In a seasonally strong quarter, NBFCs in vehicle finance could surprise positively on growth and asset quality.
Public sector banks (PSBs)
Most PSBs are expected to report losses at a PBT level, driven by increased provisioning triggered by the end of restructuring dispensations. Slippages could shoot up multifold as banks reclassify a major portion of their restructured books (incl. SDR, S4A exposures) as NPAs. Delays in a large disposal transaction and recognition of a large account (both in the telecom sector) will show up. Growth revival is expected to continue for BOB primarily driven by retail loans. Though slippages will be elevated, operating metrics should remain strong. High-interest reversals will keep NIMs under pressure. RBI divergence will be keenly eyed. For SBIN, we expect loan book to remain flattish sequentially. Asset quality should further deteriorate owing to revocation of all the restructuring dispensations. However, the allowance of spreading MTM losses over 1HFY19 should provide some respite. We expect SBIN to report a loss for the second consecutive quarter.
Private sector banks
For yet another quarter, the divergent performance across private banks is set to continue. The subdued show for corporate lenders will continue as asset quality woes will weigh on earnings through growth may pick up. Commentary on accusations of misconduct by CEOs of ICICIBC and AXSB will be interesting to note. On the flip side, retail focussed banks are expected to report stellar numbers with robust growth, steady NIMs and stable asset quality.
Small finance banks (SFBs)
SFBs are expected to report good earnings. AU is expected to report strong growth in loan book of 10% while Equitas and Ujjivan are expected to report growth of 4-5%.. Earnings are expected to be better owing to lower credit cost as both Ujjivan and Equitas have largely provided for the delinquent book. Opex is expected to increase for Ujjivan and AU while it is expected to be stable for Equitas. We remain positive on Ujjivan and Equitas owing to sizeable lending opportunities along with the lower strata population. Though we are positive on AU, we find valuation rich.
DHFL is expected to maintain strong traction in the disbursement. While LICHF is expected to report 15% AUM growth, Repco is expected to report 10% growth. For LIC HF and DHFL, NIM is expected to be under pressure owing to hardening in the wholesale rates. Asset quality is expected to be improving for Repco.
Vehicle finance (VF) NBFCs are expected to report strong disbursal momentum, thus leading to healthy AUM growth. With better collection efficiency we expect a meaningful improvement in asset quality.
Should remain healthy despite the hardening of wholesale rates. Though the shift to 90DPD will optically impact asset quality and margins for SHTF, superior PCR will cushion earnings. SCUF, too is expected to deliver healthy AUM growth driven by strong 2W disbursals. SCUF will be impacted by the shift to 90DPD.. However, utilization of the RBI dispensation for its MSME slice would be keenly watched.
Both SBI Life and Max Financial are expected to report APE growth of 15-18%. However, ICICI Pru Life is expected to face negative growth of 8.6% on the higher base and volatile equity market. VNB Margin for all the players are expected to improve driven by higher operating scale and increase in the share of protection.
We remain constructive on the retail lending space given the huge opportunity and under-penetration. Additionally, the corporate segment will provide retail focussed banks a unique opportunity to grow rapidly, as corporate lenders remain largely dormant due to asset quality issues.
Hence, we continue to prefer KMB, CUBK and DCBB. Despite various apprehensions, we prefer ICICIBC in the corporate space, purely due to attractive valuations. NPA recognition and changes in top management will be key monitorable. In the NBFC universe, we remain positive on CIFC (despite rich valuations) given superior operating metrics and improving return ratios. DHFL and REPCO are our top HFC picks given a strong presence in Tier III/IV cities and huge opportunities in the affordable housing space. Amongst SFBs, we prefer Ujjivan and Equitas, while we find valuation of AU rich. We remain positive on Life Insurance sector is driven by financialisation of savings and under-penetrated market with SBI Life as our top pick.