Banks set for strong loan growth in Q4

Banks are expected to report stronger credit growth in the January-March quarter, on the back of a healthy consumption trend and improving corporate credit growth.

Public sector banks have outperformed private banks in the recent past. Banks also expect margin trajectory to remain robust, while an improving asset-quality resolution should provide further fuel to profitability.

“India’s banking sector has been a clear outperformer in 2022, led by stronger-than-expected credit growth after years of a lacklustre performance, sharp margin uptick benefiting from the rate cycle and a far stronger balance sheet now,” said Anand Dama, senior research analyst at Emkay Global Financial Services. “We remain positive on the sector and prefer ICICI Bank, Axis Bank, IndusInd Bank, State Bank of India and Bank of Baroda.”

Recent data by the Reserve Bank of India suggest that bank loans surged nearly 18% in November, compared with 7% a year earlier, reflecting demand buoyancy from both individuals and companies despite an increase in financing costs since early summer.

Credit to industry continued to register a strong pickup, with total loans accelerating to 13.1%, while personal loans expanded at 19.7% in November, largely driven by housing and vehicle loans.

Over the past couple of years, credit off-take has mostly overcome the Covid-induced lag and has grown by around 25.2% to almost catch up with deposit growth of 27.3% over the same period.

“The banking sector credit picked up smartly in FY23, following two years of muted growth with the recovery of economic activity,” said Aashay Choksey, vice president & sector head-financial sector ratings at ICRA.

“The improved capital position, coupled with an increasing growth appetite, should help banks continue on their recent performance trajectory. We, however, remain cautious of a sharper-than-expected rise in systemic interest rates and a resultant impact on the asset quality,” Choksey said.

Capacity utilisation was 72.4% in the June quarter, remaining above the average level of 71.3%, indicating positive capex-led demand for the following quarters, analysts said. Also, debit bounce rates have largely remained stable since April 2022, and are at their lowest levels in four years, indicating strong asset quality.

“Strong loan growth trend across retail, industry and services segments is confidence-inspiring,” said Suresh Ganapathy, associate director at Macquarie Capital. “Previously deleveraging sectors like cement and steel have gained good growth momentum since July 2022. This uptrend could be a mix of increasing working capital requirements and some return in a capex-led demand.”

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