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The banking and finance system in India plays a significant role in promoting economic growth by efficiently allocating resources. The private sector banks are those where private shareholders rather than the government holds the majority of the shares or equity. The private sector banks play a vital role in the Indian economy. They provide a healthy competition on general efficiency levels in the banking system.
*Axis Bank and Bank of India were in losses in previous quarter and previous year respectively. They have a positive PAT now.
This sector is in limelight after strong recovery from IBC resolutions increasing earnings, improvement in asset quality, low slippages and better ratios. Banking and finance stock, loan growth though is a bit disappointing as seen from RBI’s macro data.
· SBI, ICICI are the outliers as their recoveries are higher than 90% from entities like Essar Steel, Ruchi Soya, Prayagraj Power and some mid-sized accounts.
· Axis’ PAT difference is due to tax adjustments and hasn’t seen any direct benefit from Essar Steel recovery as it was sold to Asset Reconstruction Company.
· Slippages in accounts like DHFL has washed out positive impact of IBC resolutions to an extent.
· It can be clearly observed from the numbers that the credit growth has considerably slowed down and could have impact on margins/earnings. The average revenue growth for this sector was just 1.7% QoQ and around 17% YoY. Most of this is driven by growth is retail loans at around 16% YoY. So, retail growth shouldn’t worry most of the banks. The banks also have to create provisions for exposure to Telecom sector looking at the stress that is build up.
· HDFC Ltd has recognized a fair value gain of Rs90bn on de-recognition of investment in GRUH in 3QFY20.
· Kotak’s changing mix towards retail is helping overall margin improvement.
· Among AMCs, HDFC is the largest in terms of size. It is noteworthy that Nippon AMC has been able to stop the decline in AUM, led by growth in liquid funds business. Since Nippon takeover towards end of Sep-19, liquid funds’ AUM has grown by 26.5%.Merger benefit are very gradually flowing in with Bank of Baroda currently on OPEX, while other parameters continue to be muted especially loan growth, margins and provisions.
Talking about NBFCs, funding continues to be a challenge and growth has been challenged due to this, though large players continue to enjoy a disproportionate access to funds.
As competition from banks exists, growth in the core home loan has remained a challenge for HFCs. LICHF may continue to find it particularly difficult to compete with the external benchmark linked offerings of banks. Also, the co has not been able to benefit from the exit of two large HFCs from the market over the past year. Asset quality is another major concern for LICHF, particularly in its developer finance book, given the stress faced by the sector.
Insurance companies’ APE (Annual Premium Equivalent) growth (a common sales measure calculation used by insurance companies, where the sales of a given insurance company are estimated by taking the value of regular premiums, plus a percent of any new single premiums written- normally 10 percent) have been varied but companies continue to focus on protection business, although margin profile will be different due to varied strategy for banking and finance growth.
· SBI Life has +18% APE growth and good margins & persistency. HDFC Life growth has been marginally lower. ICICI Pru Life has struggled on growth but growth protection mix has retained steady margin profile of around 20%.
2020 Outlook:
The market had welcomed the management change at ICICI as the bank delivered everything well during Oct-Dec 19 and the same is likely to continue in future as well. We remain positive on SBI and ICICI due to their strong potential and RoE. We also see value unlocking opportunity in SBI’s unlisted subs over coming years, which will boost its SOTP value. In mid-caps, AUBank & Federal Bank would be our top picks. We think near-term loan growth will be driven by retail and prefer large private banks like HDFCB, ICICIBC and AXSB as they are well placed to gain loan market share.
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