Early results show investors will be very selective with bank stocks

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

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. Credit growth has improved. Investors are adjusting for a poor Q1, 2021-22, given the second 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 year-on-year (YoY) to Rs 4,693.7 crore, which includes contingencies of Rs 1,300 crore versus Rs 3,414 crore in Q4, 2019-20. Net profit was Rs 8,186.5 crore, up 18 per cent YoY, which was below consensus estimates of Rs 8,436 crore. The net interest income (NII) grew 12.6 per cent YoY to Rs 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 of 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 bottomline grew 260 per cent to Rs 4,403 crore compared to Rs 1,221.40 a year ago. NII grew by 16.9 per cent to Rs 10,431 crore in Q4FY21, compared to Rs 8,926 crore in Q4FY20. The NIM was held at 3.84 per cent in Q4, which is 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, which is the smallest, was credit to small medium businesses (SME), with 32.5 per cent growth.

Provisions dropped by a sharp 51.7 per cent YoY to Rs 2,883.47 crore (the base of Jan-Mar 2020 was a poor quarter) but increased 5.2 per cent on sequential basis. The bank made additional Covid-19 related provisions of Rs 1,000 crore during Q4, 2020-21 and held total Covid-19-related provision of Rs 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 will 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.