Dolat Capital: Banks - Q2 FY21 Results Review; Increased Optimism

Dolat Capital Report

We witnessed plenty of optimism across banks in Q2 FY21, with ECLGS coming to rescue for several medium/micro enterprises and better than anticipated business activity at ~80-85% of pre-Covid levels.

Confidence was also evident from several banks not making any incremental standard provisions against the pandemic (KMB, ICICIB). Recoveries/upgrades across several banks were much better than expected, despite the NCLT embargo, aiding GNPA ratio on a pro-forma basis. Collection efficiencies were surprisingly high (~95%), but could be driven by disbursements under the government’s ECLGS scheme and savings led by six-month moratorium. Sustainability of the collection trend will be key.

Lower interest reversals due to standstill on NPAs, strong comeback in fee income, elevated treasury gains, and benefits on opex insured better than expected operating profits during the quarter despite muted growth trends and excess liquidity. NII and PPoP grew by 22% and 21% YoY respectively in 2QFY21 for our coverage universe.

In line with the positive note from lenders and improving high frequency data, we have seen strong catch up in valuations across banks, more so large private sector banks.

However, while activity is inching closer to pre-Covid levels, it is important to note that it still remains in a contraction mode. And risk/impact of a second Covid wave remains a grey area.

Even at current levels, we see in SBI due to improving operating metrics, limited asset side risks in large corporate and retail portfolios, and strong valuation comfort. Concerns over any possible mergers are also behind the bank now.

The differential in standalone valuation between a HDFCB and KMB has widened materially (~33% higher for KMB) and we expect that to narrow. In our view, HDFCB remains best positioned on earnings even if there are any risks to ongoing optimism. KMB, though a formidable play, looks richly d on a relative basis.

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