Banking & Finance: Strong retail growth, but should slow down; incremental spreads improve in Oct’23

1 Dec 2023 , 10:10 AM

System non-food loan growth momentum continued at 1.8% MoM and 20% YoY (15% ex. HDFC merger) in Oct’23. MoM growth was mainly driven by MSMEs, Retail, Agri and NBFCs. Large corporate was muted. Analysts of IIFL Securities believe that festive demand in Nov and a seasonally strong Q4 should keep growth momentum healthy. However, recent increase in risk weights for unsecured consumer and NBFC loans should slow down growth in these segments over the coming quarters. Incremental loan yields for SCBs improved 12bps MoM. Interest spreads improved by 15bps for PSU banks vs 2bps decline for private. Analysts of IIFL Securities continue to expect divergent margin outcomes for banks with the expansion for HDFC, IIB, Federal and RBL; higher contraction for ICICI, Kotak and SBI; and lower for Axis and BOB. 

Healthy loan growth driven by MSME and Retail: 

System non-food loans grew 1.8% MoM and 20% YoY (15% YoY ex. HDFC merger) in Oct’23. Deposit growth improved, but continues to lag at 13.5% YoY; resulting in loan-to deposit ratio staying put at 79%. Sectoral deployment data showed MoM growth mainly driven by MSMEs, Retail, Agri and NBFCs. Retail loan growth further improved to 33% YoY (21% ex. HDFC), led by unsecured and housing loans. RBI direction on increase in risk weights for unsecured consumer and NBFC loans should slow down growth in these segments, over the coming quarters. Analysts of IIFL Securities expect loan growth to taper down to 13%, but become more broad-based in the medium term. 

Incremental loan yields improve for SCBs: 

WALR on o/s loans was largely flat MoM and QoQ. However, incremental loan yields improved for both PSU and private banks by 4bps /2bps, respectively. MCLR for PSU banks remained flat (5bps rise for few), while some private banks (IDFC, KVB, YES) reported 15-20bps increase. Analysts of IIFL Securities expect residual loan yield increase to be only 10- 15bps, due to back book re-pricing of MCLR and fixed rate book. 

Incremental cost of deposits have peaked, but COF continues to rise on re-pricing: 

WATDR on fresh deposits declined by 1bp for the SCBs. However, it increased by 6bps on o/s basis, owing to the re-pricing of maturing TDs. This resulted in 8bps of spread contraction for private banks vs 3bps for the PSU banks. As discussed in analysts of IIFL Securities initiation report, they expect divergent near-term margin outcomes – expansion for HDFC, IIB, Federal Bank and RBL; higher contraction for ICICI, Kotak and SBI; and lower for Axis and BOB.