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Credit growth running ahead of expectation, led by unsecured retail and corporate credit pick-up

The Indian banking system’s growth remains robust at 14.9% YoY (ex-HDFCL) for the fortnight ended August 11, 2023 (vs. 14.7% YoY for the previous fortnight); and if the current momentum continues, it could surpass the earlier expected 12% growth in FY24. The current credit momentum is supported by aggressive growth in unsecured loans (incl. PL and Cards) as banks remain pro-risk, while underlying demand trends remain strong. Mortgages growth has moderated a bit amid elevated lending rates, but still remains healthy at 15% YoY and lenders/RE developers are looking at festive cheer for some revival. VF business is also showing a healthy growth trend, with banks now incrementally looking at used car financing business as well with the advent of online platforms. On the corporate front, NBFC and trade segments remain the key growth drivers, but even core sectors like metals and petroleum are showing healthy growth, indicating that growth is now becoming broad-based. Though economists remain divided on capex cycle revival, bankers indicate that the early signs of corporate capex revival are visible and should firm-up in the absence of any macro-shocks. We believe the impact of late weak monsoon on overall credit growth could be limited as current growth is mainly driven by strong urban consumption demand and corporate credit, but need to watch for second order impact in case food inflation spirals up

Credit card growth trends remain healthy; all eyes now on the festive season to prop-up sales

Overall, net card addition remains healthy at 1.2mn in Jul-23 (vs. 0.9mn in Jun-23), with total CIF now reaching 88.7mn. Spends growth has also been robust at 25% YoY/5% MoM to Rs1.5trn, owing to healthy card addition and partly due to a higher number of days in July. Most of the card players have maintained the CIF market’s share similar to FY23 levels, with HDFC Bank being the highest at 21%, SBI at 20%, ICICI Bank at 17% and Axis Bank at 12% (due to the acquisition of Citi’s portfolio). However, in terms of spends, HDFC Bank/SBI has lost some market share in recent months from 28.6%/18.3% in Apr-23 to 27.2%/17.9% in Jul-23, while ICICI has gained some market share – 17.8% in Jun-23 after a drop in Apr-23 to 17%. Axis has gained 20bps market share from Mar-23 to 12.2% in Jul-23 despite devaluation of Magnus, as the changes will be implemented by Sep. 1, 2023. With post-Covid pent-up demand benefit now largely behind, most card players are looking forward to the festive season to onboard new customers and accelerate spends/EMI growth, which in a way should intensify the war between card companies. As far as asset quality is concerned, we believe the recent incidents in SBIC and RBL are specific to certain portfolios and do not suggest any generalized weakening of asset-quality trends in the overall card business.

Deposit growth trending well, but recent ICRR guidelines squeezed out liquidity and could hurt margins a bit

Overall, deposit growth (ex-HDFCL) has been healthy at 12.6% YoY, but recent RBI’s decision to impose 10% Incremental CRR (ICRR) on the increase in NDTL between May 19 – July 28 to absorb excess liquidity created post withdrawal of Rs2K notes has led to some liquidity squeeze for banks. We believe banks were deploying the easy liquidity into short-term papers and, thus, earning additional interest income, which we believe will now come-off and, thus hurt bank’s margins a bit, already reeling under the pressure of cost catch-up. However, the impact for HDFC Bank will be higher, though unfair, as ICRR norms will not exempt public deposits acquired due to the merger of HDFCL. Moreover, some banks were contemplating deposit rate cuts, which at least for now seem to have put the plans on the back-burner post implementation of the ICRR. That said, the RBI has been clear that ICRR is a temporary measure and it would withdraw the same before the onset of the festive season so as to avoid any disruption.

Prefer to remain selective among banking stocks

We expect Q2 to be soft for banks in general, which coupled with emerging concerns around rain deficit in August and, thus, the impact on rural economy/inflation could distort the sentiment in the near term. We believe the impact of late weak monsoon on overall credit growth could be limited as it is mainly driven by strong urban consumption demand and corporate credit, but it could have some impact on agri asset quality (particularly KCC) for agri-heavy PSBs (SBI, PNB and CBK) and private banks (HDFC Bank). Our preferred picks in the large-cap space include ICICI, IIB and BOB; while we prefer KVB, RBL and Indian Bank (>50% of agri loans backed by gold) in the small-mid cap space. Within the NBFC-MFI space, we prefer CREDAG the most, followed by Fusion.

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