The second wave of COVID-19 disrupted the credit growth and asset quality across the banking and financial sector. The local lockdowns-led restrictions and risk-aversion by banks led to systemic credit growth coming in single digits.
However, as compared to the first COVID wave, the overall impact on the asset quality of banks would be much lesser during the first quarter of fiscal 2022. Sufficient provision buffers made by lenders in the last few quarters would have minimised the impact of the second wave on their profit & loss.
Domestic brokerage Emkay Global estimates credit growth of 6 percent YoY (down 1 percent QoQ) in Q1FY22 for banks, largely in line with systemic credit growth and reflecting underlying disruption in retail/SME sectors.
For FY22, it expects overall credit growth of around 9 percent with a reasonable pick-up in retail credit in H2FY22 and back-end working capital demand from corporates.
The asset quality of the banking sector is likely to have been impacted by the second wave, but considering less stringent lockdowns this time, overall NPA formation is estimated to remain moderate and will be partly offset by restructuring/ECGS.
For most lenders, collection efficiency (CE) reached pre-COVID-19 levels in Q4 FY21 before the second wave struck. Subsequently, CE declined and the bounce rate saw an uptick in Apr-May’21, according to brokerage firm Anand Rathi.
However, collection efficiency improved in June 2021.
Overall pre-provision operating profit (PPoP) growth is likely to be soft due to subdued growth or continued softness in net interest margins (NIM) accentuated by NPA recognition, moderate treasury support, and lack of large one-off gains, Emkay Global said.
Overall credit cost too could be elevated due to upfront stress recognition, partly offset by some contingent provision buffer usage by select banks.
Among large banks, the brokerage expects ICICI Bank to report healthy profitability, led by better NIMs/moderate credit cost, while Axis Bank may have the option to clawback provisions to boost profitability.
HDFC Bank's growth trajectory remains moderate, but it should be able to deliver around 20 percent YoY profit growth.
IndusInd Bank and RBL Bank should report slightly weaker numbers. IndusInd Bank, in particular, may look to strengthen provisioning buffers, leading to elevated credit costs. Bandhan should continue to reel under MFI pain, as per the brokerage report.
Public sector banks, in general, may report moderate PPoP due to soft treasury performance, but limited credit cost and lower tax incidence for select banks (Indian Bank, Union Bank) should boost profits. SBI and Indian Bank will be outliers, Emkay Global said.