Banking - credit momentum intact; LDR easing albeit at a slower pace; Edelweiss

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n  Banks on track to comfortably achieve 20% plus credit growth in FY11

Indian banks have reported 23.3% Y-o-Y growth in bank credit to INR 38.1 tn for the fortnight ending February 25, 2011. At the same time, deposit growth continued to lag at 16.5% Y-o-Y and stood at INR 48.4 tn (1.4% fortnightly growth). Net credit offtake for the latest fortnight has been INR 259 bn (1.3% fortnightly growth) (refer Table 1).

Banks have reported credit growth YTD (April 2010 to February 2011) of 17.6% vis-à-vis deposit growth of 12.2%. Historically, we have seen ~4% M-o-M growth in March in credit offtake as well as deposit mobilisation. Considering this, we expect system-wide credit growth by the end of this fiscal at ~22% and deposit growth at ~16% (refer chart 1 and 2).

n  Incremental LDR, though easing, not very encouraging

Gyrating to liquidity tightness and directive by RBI to ramp up deposit mobilisation, start of December banks have aggressively hiked deposit rates. As a result, post December deposit growth has outpaced (~6%) credit growth (4.7%). Incremental loan-to-deposit ratio (LDR) YTD, though has eased to 100% from as high as 113%, is still not very encouraging. While advance tax outflows and higher credit offtake in March will keep liquidity and wholesale rates under pressure, we expect slackness in credit offtake in Q1FY12 and relatively better deposit growth (due to higher rates) to improve the liquidity situation. We, therefore, expect wholesale rates to come off post March; also, retail deposit rates are nearing peak at present.

n  Data on sectoral deployment of credit: Industry still the flag bearer

Sectoral deployment data, released up to January 28, 2011, highlights the continued buoyancy in the industry segment. A key positive has been the broad-basing of industry credit with contribution flowing from basic metals, engineering and food processing, supporting the key growth vector - infrastructure. Performance on retail credit (up 16% Y-o-Y vis-à-vis 2% a year back) is improving on the back of increased traction in vehicle loans and housing. The services segment has registered 23% Y-o-Y growth, largely propelled by 41% growth in funding to NBFCs, whereas commercial real estate funding is flat M-o-M (a reflection of tightness in funding to sector, post the break-out of loan for cash scam)