Investors will be very selective about bank stocks

HDFC Bank disappointed, while ICICI Bank’s Q4 boosted sentiment lifting many peers

Investors are seeking clarity on several key areas in banking. The results of two bellwethers have led to mixed responses. Provisioning seems more or less in line with proforma estimates of Q3 and credit growth has improved. Investors are adjusting for a poor Q1FY22, given the second Covid wave.

The Street was disappointed by HDFC Bank and enthusiastic about ICICI Bank. The ICICI stock has surged and it pulled up several other banks in its wake. HDFC Bank missed Street estimates mainly due to higher provisions. Provisions rose 24 per cent YOY to ~4,693.7 crore, which includes contingencies of ~1,300 crore versus ~3,414 crore in Q4FY20. Net profit was ~8,186.5 crore, up 18 per cent YOY, which was below consensus estimates of ~8,436 crore. The net interest income (NII) grew 12.6 per cent YOY to ~17,120 crore. Growth in advances was 14 per cent and the net interest margin (NIM) was 4.2 per cent. Of this, retail advances were up 6.7 per cent. The reported gross NPA ratio at 1.32 per cent was better than the proforma gross NPA of 1.38 per cent in Q3. Investors were also wary about the RBI’S restrictions on issuing fresh credit cards.

ICICI Bank, in contrast, had a blowout Q4. The bottom-line grew 260 per cent to ~4,403 crore, compared to ~1,221.40 a year ago. The NII grew 16.9 per cent to ~10,431 crore in Q4FY21, compared to ~8,926 crore in Q4FY20. The NIM was held at 3.84 per cent in Q4, which was up sequentially from 3.67 per cent (December 2020) but lower in YOY terms from 3.87 per cent (March 2020). Overall, credit grew 13.7 per cent, while retail loans grew 20 per cent. The fastest-growing segment, also the smallest, was credit to small and medium businesses (SMES), with 32.5 per cent growth.

Provisions dropped by 51.7 per cent YOY to ~2,883.47 crore (the base of January-march 2020 was a poor quarter), but increased 5.2 per cent on a sequential basis. The bank made additional Covid-19 related provisions of ~1,000 crore during Q4FY21 and held the total Covid-19-related provision at ~7,475 crore. The net NPA ratio declined to 1.14 per cent in Q4 from 1.26 per cent (proforma December 2020.) The second wave could carry a negative surprise since, going by last year, lockdowns would hit the SME segment hard and that’s the big growth area for ICICI Bank.

The Bank Nifty shot up 1.7 per cent, driven by ICICI Bank’s results over the weekend, even though it has a negative return (minus 3 per cent) in the last month. Apart from ICICI Bank, other winners included Axis Bank and RBL Bank, SBI, Federal Bank, and IDFC First Bank. However, even on a bullish day, HDFC Bank failed to score and Bandhan Bank saw sellers. Going by Street reactions, investors are likely to be very selective.