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Sluggish credit growth likely to continue while asset quality to
stabilise
Loan growth is expected to be muted at 12-13% in FY15, largely on the back of a
slowdown in corporates. However, Retail, Agri, Working Capital and SME are
expected to be the key growth drivers for industry in the near term. The second
quarter of this financial year (Q2FY15E) is also expected to turn out to be tepid for
the banking sector in terms of credit growth as corporate lending remains weak.
For our coverage universe, we expect credit growth to remain above industry
average, mainly led by private sector banks. As per the latest release by RBI, advances
are said to have grown by 9.7% y-o-y as on September 19, 2014 (vs 17.6% y-o-y
growth in Q2FY14). However, private sector banks and NBFCs are likely to remain
ahead of system growth majorly driven by retail loan book. At the same time, deposit
growth (13.4% y-o-y as on September 19, 2014) has continued to be faster than the
loan growth, resulting into sufficient liquidity in the system. We believe that it will
take at least a couple of quarters for macro recovery to start reflecting in loan growth
of the banking system.
The aggregate NII for our banking coverage universe is expected to increase at
modest pace of 14% y-o-y with private banks outperforming. From our coverage
universe, 1) HDFC Bank and Bank of Baroda are likely to maintain above industry
average growth majorly driven by retail advances followed by higher advances
growth by Axis Bank and 2) Bajaj Finance likely to continue with its robust
performance in terms of Assets Under Management (AUM) growth with increase
of 36% y-o-y followed by Capital First with 30% y-o-y increase in Q2FY15E.
Asset quality pain is likely to continue for PSBs while private sector banks
and NBFCs better placed:
Asset quality pain is likely to continue for the banks in Q2FY15E, especially public
sector banks. PSU bank’s fresh delinquency is likely to remain at elevated levels
(albeit lower than earlier quarters), headline numbers might look better on back of
aggressive recovery and sell-down to ARCs. However, we expect NPL sale to ARCs
would decrease in Q2FY15 as ARCs would require higher amount of capital now as
per the RBI’s revised norms. We believe that fresh impairment would remain at a
high level for PSBs in the next few quarters. Although NBFCs have performed better
than the banks in terms of asset quality, past few quarters have witnessed steady
rise in NPAs. For private banks, we expect fresh slippages to stabilize during Q2FY15
while restructuring to remain elevated as the restructuring pipeline continues to
increase further for corporate lenders.
Margins to remain flattish sequentially for the entire industry:
The deposit growth has continued to be faster than the loan growth, resulting into
sufficient liquidity in the system which should help banks in reducing their cost of
funding. Moreover, the decline in short term rates in Q2FY15 to benefit banks /
NBFCs with higher share of bulk deposits. However, the lending yields are believed
to be under pressure on account of lower incremental loan growth. Considering
the above factors, we expect NIMs to remain stable on q-o-q basis. NII growth for
state-owned banks is expected to be at 13% y-o-y (3% q-o-q), while private banks’
growth is expected to be at 14% y-o-y (2% q-o-q), led by stable NIMs.
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