Motilal Oswal: BANKING: Deposit growth picks up at 15%; Loan growth at 20%; Prefer PSU Banks

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BANKING: Deposit growth picks up at 15%; Loan growth at 20%; Prefer PSU Banks

Key takeaways from latest RBI data on business growth of scheduled commercial banks for fortnight ended 8^th October 2010:

-          Loan growth increased to 20.1% YoY (on a higher base) vs 19% a fortnight earlier. Loans in absolute terms increased by Rs467b during the fortnight.

-          Deposits in absolute terms increased by Rs810b; deposit growth improved to 15% as compared to 14.3% a fortnight ago. Absolute deposit growth during the fortnight is the second highest in FY11.

-          CD ratio during the fortnight declined by 25bp to 72.5%, as deposits in absolute terms outpaced loans.

Loan growth improves to 20.1%

-          Loan growth improves to 20.1% YoY vs 19% in previous fortnight. In absolute terms, loans increased by Rs467b. Since fortnight ended 26^th March 2010, absolute loans are up ~Rs2.29t and growth is at 7.1%.

-          Non-food credit in absolute terms increased by Rs472b (vs Rs402b increase in previous fortnight). Non-food credit grew 20.1% YoY vs 19.1% in previous fortnight.

-          Our interaction with bank managements suggests that loan growth would be higher in 2HFY11 as pick-up in capex activities (post monsoon) would result in higher draw downs from earlier sanctioned loans and being busy season demand for working capital would be higher.

-          We expect credit growth of 20% for FY11 with an upward bias. We expect incremental loans of Rs6.5t in FY11 vs Rs4.7t in FY10.

Outlook and view

-          We expect margins to remain strong in FY11 led by benefits of deposits re-pricing, strong CASA base, improving loan growth, and resultantly higher CD ratio. Our concerns over asset quality are abating with uptick in economic and IIP growth.

-          Loan growth is crucial for strong core operating performance to continue in 2HFY11. We prefer selective buying and like banks with a strong core deposit franchise, higher tier-1 capital and high provision coverage ratio.

-          Among state-owned banks, SBI, Canara Bank, PNB and Indian Bank are our top picks. ICICI Bank, Yes Bank and ING Vysya Bank are top picks among private banks.