Discover more from Finding Outperformers, by Aditya Grover
Golden Era of Indian Banking System
Bank Nifty in expansion mode?
Every fortnight, RBI publishes a report named ‘Sectoral Deployment of Bank Credit’ from the data collected from 33 scheduled commercial banks (accounting for ~90% of the total non-food credit employed).
The latest report published on 31st October 2022, captured data for September month & here are its key findings:
The Non-food credit growth rate (retail + commercial) is at a 9-year high of 16.9% YoY
The Retail loans grew is at 20% YoY, of which, housing loans which constitute ~50% of the retail book, grew at 16%
Other categories within retail including loans for consumer durables, autos, personal loans, etc are growing at a rocket pace of ~25 to 60%
Commercial/Industry loans are growing at 12.6%, whereas, Services as a sector are growing at 20% YoY
Where loans to MSMEs are growing at ~30%, loans to large companies/entities are still a laggard growing at a meager 7% YoY, but the trend is positive.
The chart below shows how various segments within retail have been growing:
Now that we have talked about growth, let’s talk about other aspects including profitability & quality of loan books (NPAs). SBI, which is the highest (~25%) market share in India, reported its Q2 FY23 results yesterday, and here are 4 things you must know:
The Gross NPAs fell to 3.52% from 3.91% of loan book Q-o-Q (Multi-year low)
The slippages at just Rs 3000cr were down significantly. (Multi-quarter low, this number tells you about loans that become a fresh NPA in this quarter)
The PCR remains extremely strong at 91%. (a ratio that tells you if all the NPAs become a complete loss asset today, how much has already been written off as provision in P&L. Higher the ratio, the better it is.
SBI posted a profit of nearly ~Rs 14,000Cr (highest ever, and much higher than HDFC banks ~Rs 10,500Cr profit)
Similarly, the recent results of Axis Banks & IDFC First bank have surpassed the expectation by a huge margin with other banks reporting the number in line with expectations.
Okay, time for some caveats now:
The credit growth is coming on a low base. In FY20 & FY21, the credit growth rate was just in the range of ~5-5.6% YoY. Hence as covid is now behind us, businesses and retail are getting back to business & hence a growth rate of ~17% is not entirely out of what one can expect. (And if you can expect something, means the stock market already priced that to some extent) How much of this good news is in the price will be keenly watched out.
This is not the best-ever growth rate Indian banks have witnessed. In previous economic expansion cycles of FY2002 to FY2009, banks even witnessed a growth rate of 37% coming on a high base with an average of ~20-25% growth rate in that period. This peak rate of 37% is double the rate we are witnessing today.
Still, the size of the economy at that time was very small compared to what we have today & hence growth rate of 17% is not bad. What one should look out for is if this momentum can continue or not & whether the recent interest rate hikes by RBI stop the credit growth in India yet again.
We believe the Bank Nifty index is here to outperform the Nifty 50 index for some more months & financial names specifically in the retail lending space like Bajaj Finance & tier-2 banks like IDFC First bank have many legs of the rally which we are yet to witness.
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