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Retail loans up ~20% YoY in Aug’22 and constitute ~32% of total loans

* Systemic loan growth remained robust, hitting a new high at 16.2% YoY for the fortnight ended 9th Sep’22 (vs 15.5% in the previous fortnight). The last time systemic loan reported ~16.2% YoY growth was in Nov’13. The outstanding credit base stood at INR125.5t. In FY23, total loans have grown by 5.5%. While any material change in the demand environment needs to be monitored, given the challenging macro-environment, we expect systemic credit to grow ~12.5%/13.8% YoY in FY23/FY24, respectively.

* Retail loan growth continued to remain strong (up 19.5% YoY), led by ~27%/ ~20%/~16% YoY growth in Credit Cards/Auto/Home loans, respectively. The mix of Retail loans increased to 31.6% of total loans from 29.8% in FY21. * * Industry credit growth is recovering gradually (+11.4% YoY in Aug’22 v/s +10.5% YoY in Jul’22). Within the industry, credit to medium industries registered a robust growth of 35.6% YoY; while, credit to micro and small industries accelerated ~28% YoY. Credit to large industries grew 6.4% YoY and is witnessing healthy signs of recovery.

* Credit growth in the Services sector stood at 17.2% YoY in Aug’22, led by healthy growth in NBFCs (+27.8% YoY). Credit to Agriculture picked up and improved 13.4% YoY in Aug’22 v/s 13.2% YoY in Jul’22.

* Deposit growth remained modest at 9.5% YoY for the fortnight (up 3.6% in FY23 to date). The outstanding deposit base stood at INR170.5t. Within deposits, the banks have seen mixed trends in garnering Retail deposits, resulting in an uptick in CASA ratio by small and mid-size banks, while large banks saw moderation. In the ongoing rising rate cycle, we anticipate deposits to gain momentum.

* The gap between credit growth and deposit growth at 6.7% is at a decadal high (11-year high) except for the distortion in deposit growth during demonetization in Nov’16. While the system can still fund the growth by using excess SLR, the focus on deposits will significantly increase over FY24, thus putting pressure on deposit rates. Therefore, we remain watchful of margins over FY24, while we expect NIM improvements to continue over 2HFY23.

* The Credit-to-Deposit (CD) ratio for the system improved to 73.6% from a low of 69.6% in Nov’21. The incremental CD ratio for the fortnight stood at ~118% and it has been running well above 100% over the past one year.

Valuation and view

The Banking system is witnessing a healthy recovery in loan, growth led by a revival in the corporate segment, while growth in the Retail and SME segment remains robust. Deposit growth has been modest. However, the same is expected to see some uptick in the current rising interest rate regime. While any material change in the demand environment needs to be monitored, given the challenging macroenvironment, we expect systemic credit to grow ~12.5%/13.8% YoY in FY23/FY24, respectively. Banks with a higher CASA ratio and floating rate loans are likely to be better placed in a rising rate environment. Our top picks in the segment are ICICIBC, SBIN, IIB and FB.

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