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Credit growth stood at 6.5% YoY as on 13th Aug’21; deposits grew by 10.6%

FY22 YTD credit has witnessed a decline of 0.6% vs 1.5% decline last year

* Systemic loan growth as on 13th August 2021 stood at 6.5% YoY v/s 5.6% YoY growth for FY21. During FY22 YTD the outstanding credit base has declined by INR607b and now stands at INR108.8t. Consequently during FY22 YTD the banking system has witnessed a credit decline of 0.6% vs a decline of 1.5% during similar period last year. We expect systemic credit growth to sustain at ~8%/12% for FY22E/FY23E respectively.

* Agriculture credit growth remained steady at 12.4% YoY in Jul-21 vs 5.4% in Jul20. Retail loan growth has also been healthy at 11.2% YoY however the same stood flat over Mar-21 levels. Retail loan growth was primarily driven by higher growth in loans against gold jewellery and vehicle loans.

* Credit growth to industry remained subdued at 1% YoY however has recovered from -0.3% in Jun-21. Size-wise, credit to medium industries registered a robust growth of 71.6% Jul-21 vs 1.8% decline in Jul-20. Credit to micro and small industries accelerated to 7.9% while credit to large industries contracted by 2.9%. Within major sectors the credit growth accelerated in engineering, chemicals, petroleum, textile & paper products while decelerated in metal, cement, vehicles and construction sectors.

* Credit growth to services sector moderated to 2.7% in Jul-21 from 12.2% in Jul20, mainly due to deceleration in credit growth to NBFCs and commercial real estate.

* Deposit growth remains relatively steady at 10.6% YoY as banks accreted INR4.5tn of deposits during FY22 YTD. The outstanding deposit base thus stands at INR155.7t. Within deposits, banks have shown an improvement in garnering Retail deposits, resulting in an uptick in CASA ratios across most Banks.

* Credit-Deposit (CD) ratio for the system has thus moderated further to 69.9% - lowest in past five years. The incremental CD ratio over past one year has also moderated to ~45%. While industrial credit demand will likely remain muted in the near term due to weak capex and ongoing de-leveraging in select credit intensive sectors we expect overall growth trends to revive gradually over 2HFY22. This will be driven by continued growth in retail and agriculture while broader economic recovery will enable better growth trends in services sector as well which has moderated to 2.7% YoY vs 12.2% last year.

Valuation and view

We expect Banking system credit to grow ~8%/12% YoY over FY22E/FY23E, with Private Banks expected to grow higher (~13% YoY) in FY22E. We note that even during FY21 the loan growth over 2H stood ~6.6% v/s a decline of 1% over 1HFY21.

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. We prefer the large Private Banks (ICICIBC, HDFCB, and AXSB) over mid-sized ones. Among PSBs, SBIN would continue to report steady credit growth & earnings revival enabled by steady asset quality.

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