Healthy loan growth; expect margin divergence in Banking and Financial sector: IIFL Capital Services

2 Nov 2023 , 10:40 AM

System non-food loans grew 1.6% MoM and 20% YoY (15% ex. HDFC merger) in Sep-23. MoM growth was mainly driven by MSMEs, large corporate and NBFCs, with retail and unsecured loans remaining strong. Analysts of IIFL Capital Services believe pick up in festive demand and seasonally strong Q4 should keep the growth momentum healthy. Incremental loan yields for the PSU banks declined 17 bps MoM. Interest spreads declined by 14 bps for PSU banks vs. 4 bps decline for Private Banks. Analysts of IIFL Capital Services continue to expect divergent margin outcomes for banks with expansion for HDFC, IIB, Federal and RBL; higher contraction for ICICI, Kotak and SBI; and lower for Axis and BOB. 

Healthy loan growth; signs of becoming broad based: 

System non-food loans grew 1.6% MoM and 20% YoY (15% YoY ex. HDFC merger) in Sep’23. Deposit growth continues to lag at 13% YoY, resulting in loan-to-deposit ratio inching up to all time high of 79%. Sectoral deployment data showed, MoM growth mainly driven by MSMEs, large corporate and NBFCs. Retail loan growth momentum remains strong at 30% YoY (18% ex. HDFC) led by unsecured and vehicle loans. With the RBI wanting the NBFCs to diversify their borrowing mix and reduce reliance on bank loans, we do not rule out some slowdown in bank lending to the NBFCs, or some potential regulatory action (higher provisions/risk-weights). Analysts of IIFL Capital Services expect mid-teen loan growth to sustain and become more broad-based in the medium-term. 

Incremental loan yields decline for PSU banks: 

WALR on o/s loans was largely flat MoM and QoQ. However, incremental loan yields for the PSU banks declined 17bps MoM; whereas, it improved marginally for the Private banks. MCLR too continues to be flat for most banks (notwithstanding 5-10 bps rise for few banks). Analysts of IIFL Capital Services analysis suggests residual loan yield increase should be only 10-15 bps due to back book re-pricing of MCLR and fixed rate book. 

Incremental costs of deposits have peaked, but COF should rise on repricing: 

WATDR on fresh deposits declined by 3-4 bps for the banks. However, it increased by 10 bps on the o/s basis due to the re-pricing of maturing TDs. This resulted in 14 bps of spread contraction for PSU banks vs. only 4 bps for the Private banks. Analysts of IIFL Capital Services residual cost of deposit re-pricing analysis shows 5-50 bps of further increase in funding cost. As discussed in their recent initiation report, they expect divergent near-term margin outcomes – expansion for HDFC, IIB, Federal Bank, RBL and BOB; higher contraction for ICICI, Kotak and SBI; and lower for Axis.