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Sector leaders confining valuations

Gap between credit and deposit growth wide

The gap between credit and deposit growth sustained, with former at 16% YoY and the latter at 12% YoY. Liquidity was tight, which may strain deposit rate and margin. Some traits such as: a) elevated CD ratio (>95%), b) regulator stipulation for CD and c) trying deposit growth may feed into softening credit growth, converging to deposit growth.

Liquidity tight

The 10Y GSEC has come off 3bps MTD and 16bps YTD. Shorter duration yield (five-year corporate bonds) has fallen slightly, while tenor spread is steady. Deposit cost (on fresh deposits) has risen across, indicating further NIM strain. Some banks have surprisingly seen sharp MCLR rate cuts (as large as 28bps) in January 2024.

Retail payment – Strong growth continues

Payments grew 16% YoY with retail growth at 18% YoY. UPI growth sustained at >40% YoY and credit card transactions at INR 1.6tn (softened). The number of credit cards grew 2% MoM and 20% YoY. Spend seem softer for December, with reasonable dip in SBI spends.

Soft traction in Life; growth better for General Insurance
Life insurers’ APE growth was 15% YoY in December 2024, with 23% YoY in LIC and 10% YoY growth in private. Individual APE growth was 8.7% YoY, with LIC at 2% and private at 11.4%. GI saw better growth at 15.8% (YoY versus 10.6% YoY in November), with private at 15%, PSU at 13% and standalone health insurers up 26% YoY.

AMC SIP flows at historical high
AUM traction was stout (indices performed well, with interest augmentation for index/thematic funds). SIP accounts rose to 76.4mn in December from 74.4mn in November, up 29.7% YoY, a historical high.

Price round-up: PSU banks and non-lending outperform

In the past month, the Bank Nifty underperformed the Nifty by 5%, and underperformed ~10% in the past year. PSU banks and non-lending financiers have outperformed.

Outlook: Frontline players restraining valuations

Banks are at a peculiar phase. Front-line players – HDFC Bank, ICICI Bank, Kotak within private banks and State Bank of India (SBI) and Bank of Baroda (BoB) in PSU banks underperformed. With outperformance by other private/mid-tier PSU banks, the valuation gap between mid-tier and frontline banks narrowed. We continue to be equal weight on bank and believe, hereon, risk-reward may be more tilted to frontline peers – Expect them to perform better. No significant asset quality challenges and better growth may ensure sustained rerating for PSU banks on earnings stability – SBI and BoB are our top picks in the space.

NBFC may sustain healthy growth, on cyclical tailwinds and strong capital base. Funding cost spike seems imminent across, primarily on repricing of high-cost bank borrowings and regulatory norms. Credit cost may rise in H2, in line with regulatory restraints, but expect no meaningful negatives.

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