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Credit growth remains healthy

Retail/SME loan growth strong; industrial growth showing signs of recovery

* For the fortnight ended 15th Mar’19, systemic loan growth remained strong at 14.5% YoY (v/s 14.4% for last fortnight) with the outstanding credit base reaching INR95.5t. Credit growth was driven by both retail and the services’ segments. Also, growth in the industrial segment improved to 5.6% YoY (v/s 1.0% YoY in Apr’18), clearly showing signs of a recovery. Banks’ lending to NBFCs has also slightly improved (3.2% MoM).

* We expect loan growth to remain steady, led by (a) continued strength in the retail segment, (b) portfolio buyouts from NBFCs due to continued funding pressure, (c) the government’s recent capital infusion in PSU banks, and (d) the RBI’s decision to bring six banks out of PCA.

* Moreover, with better capacity utilization in the system, the capex cycle is also improving, which should further support credit growth. We continue to believe that private banks’ loan growth will remain healthy at ~20% YoY, driven by retail and the SME segments. Moreover, private banks should continue gaining market share not only from PSBs, but also from NBFCs.

* Deposit growth for the fortnight stood at 10.0% (v/s 9.8% the last fortnight), mainly due to a benign base. The outstanding deposit base reached INR122.3t. System CD ratio stood at 78.1% (30bp higher than last fortnight), while the investment-to-deposit ratio was at 27.8%.

 

Retail and services – key engines for growth

The retail (+17% YoY) and services’ (+24% YoY) sectors remained the key drivers of loan growth as at Feb’19. Also, industrial growth picked up to 5.6% YoY (from 1.0% in Apr’18). The share of retail in total systemic credit improved to 26% v/s 20% four years ago. Retail traction for banks was driven by strong growth in credit cards (+27% YoY), housing loans (+19% YoY) and other personal loans (+22% YoY). Further, portfolio buyouts from NBFCs could have also contributed to the growth.

 

Lending to NBFCs improves to +3.2% MoM

Banks’ exposure to NBFCs grew at 47.5% YoY (+3.2% MoM) to 6.9% of overall credit in Feb’19 (v/s 7.0% in Dec’18). Lending to NBFCs increased strongly until Sep’18, but slowed thereafter due to liquidity issues (growth slowed to 4.4% QoQ in 3QFY19 v/s 18.4% QoQ in 2QFY19). Many banks in their recent result announcements highlighted a cautious stance towards lending to select NBFCs, while confidently continuing lending to strong parentage/better rated NBFCs.

 

Maintaining preference for AXSB, ICICIBC and HDFCB

The outlook for corporate banks is improving, given the moderation in slippages, reduction in total stressed loans and improving profitability. We believe that revival in credit growth, along with improved pricing power should help drive faster NII growth. Among corporate lenders, we prefer AXSB and ICICIBC – we expect their earnings to accelerate significantly from FY20 onwards. Within our coverage universe, we maintain our preference for ICICIBC, AXSB, and HDFCB

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