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Preliminary updates to banks' business figures for the July-September quarter suggest that loan and deposit growth remains robust.
Banking analysts and industry experts said the trend is expected to continue even in the coming quarters, despite worsening global headwinds and the central bank's restrictive monetary policy regime.
“In the medium term, a well-capitalized balance sheet, improved loan growth, and the forecast of lower borrowing costs are positive catalysts that should allow valuation multiples to improve as macroeconomic stability returns,” said Nilanjan Karfa, an analyst at brokerage firm Nomura.
In this context, three narratives – banks' current account savings (CASA) – dominant compound franchises, growth-oriented earnings, and lower credit costs – are likely to unfold, Karfa said.
Read also: Bank loan rates are expected to rise even further with the anticipated tightening of the RBI, say experts.
number game
The July-September business updates from banks paint a rosy picture for the sector. Major banks, including State Bank of India, HDFC Bank, IndusInd Bank, and Yes Bank, reported double-digit growth in loan growth in the July-September quarter on an annual basis. Deposit growth has also been strong.
HDFC Bank, for example, reported a 23.5% increase in loans and advances year-on-year in the July-September quarter. On a quarterly basis, loan growth increased by just over 6 percent. The deposit base grew by 19.5% year-on-year.
IndusInd Bank also said its advances increased by 17.61% year-on-year and 4.71% quarter-on-quarter, respectively. Deposits grew 13.2% year-on-year.
The State Bank of India, the country's largest lender, said its advances stood at 67.981 million rupees in the second fiscal quarter, an increase of 16.6 percent on an annual basis and just over 5 percent on a quarterly basis. Deposits were at Rs 88.503 crore, an increase of 1.9% year-on-year.
The relatively smaller peers Federal Bank, Bank of Maharashtra, and Karur Vysya Bank reported a similar trend, as seen in the chart below.
Not only banks, but mortgage lender HDFC also followed the trend. Loans granted to HDFC amounted to Rs 9,145 crore in the July-September quarter, an increase of 28.2% on an annual basis. Individual loans sold amounted to Rs 34,513 crore, an increase of approximately 27% on an annual basis.
What is driving the growth in lending?
Indian banks are recovering from the COVID-19 crisis, which left many Indians unemployed. Now that the economy is recovering, the supply of credit has improved significantly. According to RBI data, bank lending registered year-on-year growth of 16 percent in August. Furthermore, the figures for the July-September quarter come from behind a low base.
Now that the holiday season is approaching, analysts expect banks to capitalize on higher spending and report healthy credit growth in the coming quarters as well.
“We expect strong (credit) growth for banks. System credit is at 16%, which will likely translate into strong growth for banks,” said Hemali Dhame, associate vice president of research at Kotak Securities. “There has been improved credit utilization driven by SMEs, strong growth in personal loans, credit cards and housing.”
“We expect credit growth during the holiday season to also be healthy. We anticipate healthy credit growth trends for the year,” Dhame added.
According to Punit Patni, an analyst at Swastika Investmart, increased spending, the reopening of the economy as the coronavirus pandemic subsides, strong demand for housing and real estate, government spending, the boost in infrastructure, and high levels of capacity utilization are some examples of the reasons that explain the improved credit growth.
“Following the normalization of the effects of COVID, the banking sector is experiencing a period of positive growth, which should last for the next few quarters,” Patni added. “The upcoming festival season will be the icing on the cake, as retail spending and demand for credit remain strong.”
Demand for credit is expected to remain robust despite four successive rate hikes by the Reserve Bank of India (RBI), analysts said. The RBI's Monetary Policy Committee (MPC) has raised rates by 190 basis points since May to curb inflationary pressure. RBI rate cues are transmitted through the banking system when lenders adjust their lending and deposit rates.
Moneycontrol reported on October 3 that although lending rates are rising, bankers and analysts do not expect the rate hike cycle to reduce demand for loans.
Read also: Bank loan portfolios will grow 14-15% YoY in FY23; GNPAs seen at 5% by the end of March, analysts say.
Mobilization of deposits to continue
To finance credit growth, analysts expect banks to draw on deposits, especially following the tightening of liquidity from excess banking at a faster pace.
Lenders such as Axis Bank, DCB Bank, ICICI Bank, and RBL Bank have already increased fixed deposit (FD) rates following the RBI's rate hike. RBI Governor Shaktikanta Das, in his post-policy briefing, said there would be more traction regarding deposit rate adjustments going forward.
“We expect a rate war situation to mobilize deposits, especially in the small and medium-sized banking segment,” said Patni of Swastika Investmart. “However, banks with high CASA participation, high liquidity coverage, and low loan-to-deposit ratios are better positioned to handle the upcoming liquidity shortage.”
Dhame from Kotak Securities agreed with Patni. “Deposit mobilization will likely be the way forward,” she said. Banks have increased deposit rates since the rate hike cycle began, but not proportionally to increases in repurchases. We believe there is more room for deposit rate increases and their mobilization.”
