India's banking sector set for re-rating, but loan growth may stay moderate: Report
New Delhi, June 26
India's banking sector is set for a potential re-rating as asset quality remains resilient, but loan growth may remain moderate, as per Kotak Institutional Equities.
According to the report, asset quality is unlikely to be a concern in the near term, with both public and private sector banks expected to report lower slippages. However, banks may increase coverage buffers as they transition towards expected credit loss (ECL) norms.
"Valuations remain attractive despite recent outperformance, with scope for multiple expansion and earnings compounding," it noted.
Kotak noted that retail loan quality has strengthened compared to FY23 and pre-COVID levels, supported by tighter underwriting standards since FY24. Also, "unsecured lending should see the sharpest improvement following prior stress," it added.
However, the report flagged some uncertainty around loan demand. It said that while foreign fund inflows could help lower the cost of funds by reducing banks' reliance on deposits, they may not necessarily translate into stronger credit growth."We are a bit skeptical about the loan demand situation and believe that the strong flow of foreign funds is likely to reduce the cost of funds as it would lower demand for deposits than boost loan growth," it added.
On segmental trends, MSME loans are expected to face some stress if an economic slowdown continues for a longer period, however there is no widespread or system-wide risk at present, supported by government guarantee schemes like ECLGS and CGTMSE.
Large corporate borrowers continue to remain financially stable, with banks comfortable extending credit despite near-term sectoral uncertainties.
While benefits from improving funding conditions may vary depending on banks' growth strategies, the overall outlook remains constructive. "We see scope for multiple expansion alongside steady earnings compounding. Within this context, we maintain a relative overweight stance on frontline private banks," it said.
— ANI
Reader Comments
As someone working in a PSU bank, I can tell you asset quality has indeed improved. But the report rightly flags loan demand uncertainty. People are cautious about taking new loans despite lower NPAs. The MSME stress point is valid - we've seen some accounts showing strain due to input cost inflation. Good to see Kotak being realistic rather than overly optimistic.
"Scope for multiple expansion" - means they'll keep buying back shares and rewarding investors while ignoring depositors. Meanwhile my FD rates are 6% but inflation is 8% 😅. Private banks are doing well but please don't forget the common saver.
Interesting perspective, but I wonder if the foreign fund inflows will actually materialise given global uncertainties. The US Fed still hawkish and FIIs have been fickle lately. Indian banking fundamentals are solid though - much better than 2015-16 crisis era. Let's see how Q1 results pan out. 📈
The report's caution on MSME and unsecured lending is spot on. My friend runs a small manufacturing unit - he's struggling with working capital despite having good orders. ECLGS helped earlier but now banks are stricter. Need more targeted support for genuine MSMEs rather than just corporate and retail focus. 🏭
I liked the balanced view - not too bullish, not too pessimistic. The ECL transition will be interesting to watch. Private banks definitely look attractive for long-term investors given their strong underwriting. But retail depositors should check if their bank passes the stress test. Stay safe, diversify across banks. 💼✨
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