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Credit growth stood at 5.6% YoY as on 26th Mar’21; deposits grew by 11.4%

CD ratio for 2H stands at 80% v/s a decline in 1HFY21

* Systemic loan growth for FY21 stood at 5.6% YoY (up ~2.5% QoQ) v/s 6.1% YoY for FY20. The outstanding credit base stands at INR109.5t. While growth in FY21 was subdued, the same over 2H picked up led by a continued uptick in economic recovery, especially within the Retail segment. Loan growth over 2H stood ~6.6% YoY v/s a decline of 1% YoY over 1HFY21.

* Deposit growth stood strong at 11.4% YoY v/s 7.9% YoY for FY20. The outstanding base stands at INR151.1t. This has been achieved despite a reduction in the cost of deposits by most Banks. Within deposits, most Banks have shown an improvement in garnering Retail deposits, resulting in an uptick in CASA ratios across most Banks.

* The Credit-Deposit (CD) ratio for the system stands at decade lows of ~72.5% (barring demonetization). While the overall CD ratio stands lower, the CD ratio for 2H was strong ~80% v/s a decline over 1HFY21. This points towards a gradual deployment of excess liquidity, which is likely to support business growth over FY22E. Within 2HFY21, CD ratio was ~93% over 3Q, led by a strong festive season. The same moderated to ~65% over 4QFY21

* Most Private Banks too in their recent business updates reported a strong sequential loan growth trend in the 2-6% QoQ range (barring CSBBANK which grew ~10%). HDFCB reported domestic Retail loan growth of 5% QoQ, while domestic wholesale advances grew 4.5% QoQ. We expect Banks to report an uptick in loan growth led by a healthy traction in the Retail segment. The Corporate segment is also showing recovery signs.

* CRISIL is its recent webinar has indicated that demand in ~34 of the total 42 sectors has recovered fully. These sectors comprise 89% of total rated debt, while the most affected sectors comprise 4% of total rated debt. It highlighted that credit growth for Banks is seeing a sharp 'V' shaped recovery, aided by ECLGS disbursement and rising consumer demand. It expects overall credit for Banks to grow by 9-10% YoY over FY22, much in line with our expectation of ~11% YoY systemic loan growth.

* Given the rising COVID-19 cases and the imposition/fear of state-wise lockdowns, we have presented a snapshot of the state-wise mix of total loans and deposits. We note that the top 10 states comprise ~81%/~74% of total loans/deposits (v/s ~83%/76% in FY16). Although Maharashtra comprises the highest share with a loan/deposit market share of ~26%/20% in 3QFY21, we note that the concentration has declined by ~360bp to 26% v/s ~30% in FY16.

Valuation and view

We expect Corporate loan growth in the first half to be supported by PSU entities, while private sector demand would revive from 2HFY22E. This, along with a pick-up in the Retail segment, is likely to support overall loan growth. We expect Banking system credit to grow ~11%/13% YoY over FY22E/FY23E, with Private Banks expected to grow higher (~15% YoY) in FY22E. The balance sheets of large Private Banks are better placed v/s mid-sized peers given their: a) strong capital position, b) huge liquidity, c) cost of funds advantage, and d) higher provision coverage in the stressed portfolio. Large Banks are well-placed to gain incremental market share. We prefer the large Private Banks (ICICIBC, HDFCB, and AXSB) over mid-sized ones. Among PSBs, SBIN would continue to report steady credit growth and gain further market share

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