Loan growth to pick-up, deposits to follow

Loans CAGR (FY18-22) for large banks stood at 12.5%; this is poised to increase to an ~18% CAGR over FY22-25, driven by continued strength in growth for the retail and services segments, along with pick-up in growth for the industry segment that has been muted over the last few years (10.5% YoY growth as of July 2022). Analysts at IIFL Securities expect Axis Bank/HDFC Bank/ICICI Bank to grow in a similar band of 18-20% CAGR over FY22-25, while Kotak Mahindra Bank should grow faster (24% CAGR) off a lower base and with a lower share of unsecured loans to begin with. Loan growth for State Bank of India would also pick-up to ~16% CAGR going forward. Analysts at IIFL Securities expect deposit growth to ramp up as well to a 16% CAGR over FY22-25 (13.5% over FY18-22) with lower system liquidity and CD ratios inching higher.

Margins to remain relatively stable over FY23-25

Over FY18-22, NIM for large banks improved by ~20-80 basis points (barring HDFC Bank), driven by lower cost of funds (CASA ratios at ~43%+ currently), higher share of retail and SME loans and lower interest reversals. Share of higher yielding retail+SME loans for large banks increased substantially, by 5-13 percentage points over FY18-Q1FY23. With the tighter liquidity conditions and sharp rise in benchmark rates, outlook for margins in the near term remains positive. However, in FY24 as the COF catches up and lower-spread corporate business written now starts to contribute meaningfully, analysts at IIFL Securities see some moderation on elevated base. However, strong volume growth should continue to drive NII growth.

Core operating performance to remain strong

Banks are in a sweet spot to deliver healthy operating performance with higher loan growth, healthy margins & improving fee income traction, given higher growth in retail and SME segments. Operating expenses would create some drag. Overall core PPOP/average assets for the top-4 private banks is expected to remain stable (+/-5 basis points) for FY25 versus FY22. Treasury income would affect overall PPOP in the near term however.

Multiple factors to aid benign credit costs

Asset quality for the sector, has improved significantly, with GNPA ratio down to 5.9% as of FY22 from the peak of 11.2% in FY18 (lowest since FY15). This has been driven by faster clean up, improved underwriting and diversification of loan mix. With SMA loans at below pre-COVID levels and an under-control restructured book (~0.4-1.0% of loans), analysts at IIFL Securities expect net slippages to remain low, going forward (<1.5% annualized), which should aid in keeping credit cost low. PCR is much stronger at ~71% as of FY22 versus ~50% as of FY18, and with large banks having additional provisions at ~1.0-2.1% of loans (Kotak Mahindra Bank at 0.6%).

Return ratios to expand further

HDFC Bank/ICICI Bank/Kotak Mahindra Bank - all achieved peak RoA in FY22 at 1.9/1.6/2.1% respectively, and analysts at IIFL Securities expect similar RoAs in FY25 as well. Axis Bank and State Bank of India will likely see an RoA improvement of ~25-30 basis points over FY22-25 from a lower base of 1.2/0.7% respectively – with Axis Bank aided by lower provisions and State Bank of India by better core profitability, mainly on the opex front. Overall RoEs should see improvement due to an increase in leverage.