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India financials: Credit growth at 5.6%; profits to rise sharply

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credit growthcredit growthSteady improvement in operating profit; reversal of penal interest a one-time risk.

4QFY21 results of financials will benefit from low base driving 108% rise in profit for banks, 30% VNB growth for life insurers & 68% rise in AMCs’ profit. For lenders, slippages will be high as proforma NPLs are downgraded; core slippage will normalise. Risk can arise from reversal of penal-interest on large borrowers & additional provision. Bandhan Bank to see 40% fall in profit due to higher provision. ICICI, HDFC, Bandhan, IPru Life are our top picks.

Profit jumps on low base; op. profit to show steady improvement. For 4QFY21, we expect banks’ profit to surge sharply from Rs 124bn last year to Rs 259bn in 4Q, as last year’s profit included upfront provisioning against Covid losses. QoQ trends are more comparable with steady growth in core operating profit.

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Steady improvement in operating profit; reversal of penal interest a one-time risk. Bank credit growth is now at 5.6% but banks that reported 4Q preview saw 3-4% QoQ growth in loans. NII of our covered banks to grow 19% YoY led by 8% YoY growth in loans & low NII base at SBI last year (ex-SBI, NII rises 13% YoY with 9% rise in loans). Fee growth to improve (+2% YoY, +12% QoQ) due to sequential pick up in lending, cross sells and low base. We expect core operating profit to grow 15% YoY for the banks we cover. Aggregate treasury gains should be lower due to lower profit from stake sale and increase in bond yields. Any reversal of penal interest may lead to one time hit on earnings.

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