Banks Sector Update : Arresting growth slowdown trends By Kotak Institutional Equities
Arresting growth slowdown trends
The key takeaways from the RBI’s release on loans: (1) loan growth reversed its slowdown and grew marginally better at ~10% yoy; (2) growth for public banks was 12% yoy, while it was 9% yoy for private banks; (3) loan demand from the corporate sector continues, while housing loan growth, the largest within the retail segment, is still relatively soft in middle-income segments. We see lenders looking at a more optimistic performance from hereon.
Negligible changes to broader trends on the nature of underlying demand
The latest release (2QFY26) from the RBI on segmental information shows: (1) loan growth of 10% yoy, with public banks at 12% yoy and private banks at 9% (Exhibit 1); (2) a market share reversal, with private banks losing share to public banks (Exhibit 2); (3) a slowdown in ticket-size growth (Exhibit 3) in the mid-tier ticket-size loans (>Rs250 mn ticket size); (4) growth slowdown in the household sector (Exhibits 7 and 8) and across products (demand, overdraft and cash credit); and (5) private banks and public banks have a relatively more granular portfolio than what we have seen in the previous corporate cycle (Exhibits 10, 11 and 12).
Disbursements have picked up across segments
Our recent conversations with lenders suggest that there has been an improvement in disbursements across products, although the strength of this recovery is still yet to be tested. The balance sheets of lenders look comfortable, as much of the risk that came on the disbursements made after Covid is probably behind us. The duration of these riskier loans (personal loans) is fairly small, and we have over two years of data that the risk manifested mostly in the smaller ticket-size loans, and banks had a much lower impact than initially feared. Lenders had tightened their credit filters as a precautionary measure, implying that growth has slowed, but the newer cohorts that would incrementally have a larger share of the overall loan portfolio carry much lower risk than where it was prior to FY2023. This gives headroom for lenders to take higher risk either from a product or customer segment perspective. Unlike the previous few quarters, we seem to be seeing fewer signs of concern led by tariffs, as MSME lending remains healthy, driven by public and private banks. Credit growth to large corporates is still weak, as there is negligible demand for credit for the current capital expenditure being undertaken.
Tailwinds on cost of funds could meet with competitive pressures
We enter into a favorable environment on NIM with the cost of funds declining faster than any decline in lending yields. However, similar cost of funds, higher leverage in public banks, negligible slippages resulting in lower credit costs, and well-funded balance sheets from a CAR perspective imply that public banks can build a similar loan portfolio at lower yields and yet deliver similar RoEs. Defending market share in liabilities implies headroom to cut deposit rates is lower across players. This is likely to soften the narrative on NIM expansion.
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