Banks likely to re­coup lost mar­ket share on lend­ing side, but de­posits a chal­lenge: CLSA


IN­DIAN banks are well poised to im­prove their loan growth by gain­ing mar­ket share from bond mar­kets and non-bank­ing fi­nance com­pa­nies (NBFCs), but the chal­lenge is in com­pet­ing with mu­tual funds and in­sur­ance for re­tail de­posits, said CLSA an­a­lysts Aashish Agar­wal and Prakhar Sharma in a re­port re­leased on Fri­day, ti­tled In­dian Banks: Sec­tor out­look – Overweight.

“The bank­ing play­ers’ de­posit fran­chise is weak­en­ing due to dis­in­ter­me­di­a­tion by sav­ings plans of­fer from mu­tual funds and in­sur­ers,” the re­port said. As these in­stru­ments of­fer more tax ef­fi­cient re­turns, banks have not been able to reap the ben­e­fits of “fi­nan­cial­i­sa­tion” of sav­ings and have to de­pend on bonds and whole­sale de­posits for funds. Non­de­posit sources formed 30 per cent of in­cre­men­tal de­posit of banks last fis­cal com­pared to 11 per cent in 2017 fis­cal, it pointed out.

“Lenders face struc­tural pres­sure in the area of re­tail term de­posits, with non-bank play­ers of­fer­ing 33 per cent higher net-of-tax re­turns for the same gross yield,” CLSA said. The shift away from bank de­posits is likely to add some pres­sure to bank fund­ing costs, it said.

On the lend­ing side too, banks have been los­ing busi­ness to bonds/NBF

Cs with credit growth lag­ging be­hind at 7 per cent com­pared to 17 per cent of bond mar­kets. CLSA ex­pects this gap to nar­row over next three years as banks’ re­coup their mar­ket share and ex­pand at 12 per cent, while bonds grow at 16 per cent. After the sec­ond quar­ter earn­ings an- nounce­ments, bank chiefs did in­di­cate a shift in the mar­ket away from NBFCs, but said it is too early to pre­dict a trend. “Pri­vate lenders are best placed to gain from this op­por­tu­nity, given their stronger de­posit fran­chise, bet­ter cap­i­tal­i­sa­tion and the PCA-re­lated re­stric­tions im­posed on some PSUs,” CLSA said. Pri­vate play­ers can see a growth rate of 23 per cent, whereas PSUs will be only 6 per cent, it said. While do­mes­tic lend­ing has im­proved from 3 per cent in FY17 to around 13 to 14 per cent at present, the Ni­rav Modi fraud and en­su­ing tight­en­ing has led to de­cline of over­seas lend­ing busi­ness, lead­ing to mod­er­a­tion in over­all loan growth to 9 per cent.

“We be­lieve that ag­gre­gate credit de­mand should im­prove with eco­nomic growth and a ris­ing capex cy­cle. De­spite sub­dued capex ac­tiv­ity, we see the po­ten­tial for in­vest­ment in sec­tors such as roads and cor­po­rate spend­ing as over­all ca­pac­ity util­i­sa­tion lev­els have risen to 73 per cent and com­pa­nies may seek to in­crease cap­i­tal spend over the next 12-18 months,” CLSA said.

The PCA frame­work re­strict­ing 11 PSBs that have around 19 per cent mar­ket share in the credit sys­tem is a pos­i­tive devel­op­ment and will en­sure bet­ter dis­ci­pline in cap­i­tal al­lo­ca­tion and un­der­writ­ing, the re­port said.

On the NPA is­sue, CLSA said, “With NPL ra­tios in the steel/ power sec­tors around 40%/20%, and non-NPL stress loans in the power sec­tor at 1-2% of to­tal loans, we be­lieve the peak of tag­ging stressed loans as NPLs has largely past.” It ex­pects bad loans to nor­malise to 3 per cent of past year loans in the cur­rent fis­cal from 6 per cent last year.

CLSA also an­a­lysed at­tri­tion at the top level of banks. It ob­served fre­quent changes in the top brass at the PSBs and the re­cent RBI ac­tion curb­ing ex­ten­sions of pri­vate bank CEOs. Analysing the loan recog­ni­tion is­sues and RBI ac­tion of not grant­ing ex­ten­sions, it said, “We be­lieve Boards need to make more in­de­pen­dent de­ci­sions that may po­ten­tially chal­lenge man­age­ment. While this may slow the de­ci­sion-mak­ing process, it will struc­turally put play­ers on the right track.”

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