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Improving growth impulse in mortgages/ unsecured loans positive for banks

We hosted a call with Mr Raoul Kapoor, CEO of Andromeda Marketing (India’s largest DSA), to understand his views on the retail lending space. Here are the key takeaways:

Strong disbursement in an otherwise subdued Q1; outlook even stronger:

Overall systemic credit growth was strong at 13% yoy/2% qoq in the typically slow Q1, led by robust retail growth at 16% yoy. Retail growth, in turn, was driven by strong traction in mortgages (~14% yoy) and re-accelerating growth in unsecured loans (Cards/PL). Andromeda too clocked healthy disbursements in Jun’22 at Rs43.8bn (mortgages at Rs21bn/48%) after a slight moderation in Apr’22. The DSA expects Jul-Aug’22 disbursements to be closer to Mar’22 level (~Rs51bn). For FY23, it has set an aggressive disbursement target of Rs600bn (vs. Rs380bn in FY22), mainly driven by mortgages and re-accelerating PL/BL business.

PL, BL & LAP disbursements could surpass pre-Covid levels in FY23:

Disbursements in PL, BL and LAP have improved (albeit at below pre-Covid levels currently) and may cross pre-Covid levels in FY23, with banks/NBFCs looking to press the pedal in unsecured lending as the asset quality overhang is largely behind, said Kapoor. He believes that overall demand remains strong and thus banks/NBFCs expect to achieve higher growth without compromising credit standards. Banks continue to focus on the salaried side, while NBFCs focus on the self-employed category. Among banks, HDFCB and ICICI remain key players in the PL/BL business, while Axis is getting aggressive to accelerate growth and manage margins. Kotak still remains on the sidelines in the PL/BL business.

Rising interest rates not a deterrent as of now:

Pricing for most products in the last two months has gone up (75-100bps for HL to 7.5%, 80-85bps for LAP, 100-120bps for BL and 80-85bps for PL). Kapoor believes that the current interest rate hike is not a deterrent to HL growth as home loan rates are still below the pre-Covid levels. He believes that the surge in housing demand should be sustained as asset prices too are going up. Moreover, Covid has pushed customers to own a house instead of renting one and also upgrade the size of the house. That said, home loan rates above 8-8.5% could impact demand.

Banks continue to gain market share in mortgages; PSBs too join the race:

Armed with cost advantage and improved TAT, banks continue to gain market share in home loans. The home loan portfolio is largely based on floating rates, and thus banks would benefit from rising interest rates. After SBI, other PSBs too seek to accelerate growth in home loans and are joining hands with DSAs at competitive payout rates and even co-lending arrangements. Top banks maintained strong mortgage disbursements in May’22 (ICICI/HDFC/Axis/SBI/ BOB at Rs115bn/Rs140bn/Rs90bn/Rs160bnRs30bn). Among NBFCs, BAF is aggressively focusing on the housing business to drive growth. That said, competition from banks is heating up, and thus NBFCs/HFCs will have to focus on new segments like affordable housing to deliver growth and manage margins.

Our view:

We expect overall credit growth to remain healthy, mainly led by retail, especially mortgages and unsecured loans. Vehicle financing too is expected to pick up as supply improves in the personal mobility segment, with an improvement in CV growth in H2. We believe that large private banks with cost/technology advantage will be better placed to tap the retail growth momentum and deliver better margins. Among large banks, we prefer ICICI/HDFCB (both Buy), while among PSBs, SBI remains our preferred pick. For HDFCB, the RBI’s approval for the merger eases the overhang to some extent, though clarity on conditions set by the RBI is yet to emerge. Axis (Buy) too is accelerating growth and is available at attractive valuations (1.1x FY24E ABV), but it needs to overcome the opex flipflop. We also like IIB, FB and KVB in the small- and mid-cap stocks.

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