Banking outlook positive as loan growth to revive, margins to stabilise

As India’s Covid-19 vaccination count nears the 85-crore mark, and the country looks set to put a series of disruptive lockdowns behind, its economic trajectory could finally be looking up, bankers say. 

Top bankers are upbeat on the prospects of credit growth, as government spending appears set for an upswing and risk appetite and demand in the economy come back to pre-Covid levels, according to a report by IIFL Securities.

Senior executives at Axis Bank, HDFC Bank, ICICI Bank and IndusInd Bank say that in the near future, the banking sector could witness four major trends, the report said.

An uptick in loan growth

First, credit offtake or loan growth could pick up by the second half of 2022. This, banking industry executives say, will be driven by an increase in government spending mainly in the infrastructure segment, with private sector capital expenditure following close behind. 

Even as their loan books begin to look healthier, banks are unlikely to take undue risks and lend to businesses, and will focus on companies with good credit ratings. Going forward, the accent is likely to be on client-level profitability, as opposed to merely shoring up loan disbursement numbers. 

Stable margins

Bankers feel that excess liquidity will persist for a few quarters, according to the report. This will mean that interest rates could bottom out, before they begin to go up again. 

In the next couple of quarters, banks would keep margins stable as they keep getting weighed down by excess liquidity. But beyond that, as credit offtake picks up, especially toward the riskier medium and small enterprise segment, margins will begin to rise, as interest rates begin to inch up again. 

Tech spends will drive up costs

In the near term, banks would have to continue to spend on their technology backbones, to compete with new-age fintech players who have not only made it much easier but also a who lot cheaper for the customer to move money and to invest in the stock market, mutual funds, buy insurance, debt instruments and other financial products.

This increased spending on technology would mean a spike in costs, at least in the near term, till they are offset by higher operating efficiencies and revenues from cross-selling of products. 

Asset quality improving 

Bankers say that while efficiencies in collections have continued to improve, there could be slippages, which would go down meaningfully only by the second half of 2022. 

While loan restructuring could see an adverse impact on the emergency credit line guarantee scheme book, most big banks should be able to whether this, given their high levels of provisioning coverage ratios. 

Axis Bank 

Axis Bank says it will look to grow loans at 5-6 percentage points higher than the industry (which is expected to grow at about 6.5% in FY22).

HDFC Bank 

HDFC Bank says that its retail loan segment is seeing healthy demand and that inquiries are already at pre-Covid levels. 

ICICI Bank

ICICI Bank says margins are likely to remain at the current level of about 3.9% in the near term, as benefit on the cost of funds is negated by pressure on lending yields. The bank is hopeful of margin improvement over a medium term.

IndusInd Bank

IndusInd Bank is looking to grow its loans in the mid-teens over the next two years from about 6.5% currently. Retail loan growth for the bank could remain weak for the next one-two quarters. Hence, loan growth would be driven by the corporate segment in the near term, the IIFL Securities report says.