Motilal Oswal Financial Services

Sector Update

Update | Financials

Sector

| 29 March 2019

Financials

Credit growth remains healthy

Retail/SME loan growth strong; industrial growth showing signs of recovery



The share of retail loans

increased to ~26% of the total

loans



For the fortnight ended 15 Mar’19, systemic loan growth remained strong at 14.5%

YoY (v/s 14.4% for last fortnight) with the outstanding credit base reaching INR95.5t.

Credit growth was driven by both retail and the services’ segments. Also, growth in

the industrial segment improved to 5.6% YoY (v/s 1.0% YoY in Apr’18), clearly showing

signs of a recovery. Banks’ lending to NBFCs has also slightly improved (3.2% MoM).

We expect loan growth to remain steady, led by (a) continued strength in the retail

segment, (b) portfolio buyouts from NBFCs due to continued funding pressure, (c) the

government’s recent capital infusion in PSU banks, and (d) the RBI’s decision to bring

six banks out of PCA.

Moreover, with better capacity utilization in the system, the capex cycle is also

improving, which should further support credit growth. We continue to believe that

private banks’ loan growth will remain healthy at ~20% YoY, driven by retail and the

SME segments. Moreover, private banks should continue gaining market share not

only from PSBs, but also from NBFCs.

Deposit growth for the fortnight stood at 10.0% (v/s 9.8% the last fortnight), mainly

due to a benign base. The outstanding deposit base reached INR122.3t. System CD

ratio stood at 78.1% (30bp higher than last fortnight), while the investment-to-deposit

ratio was at 27.8%.

Within retail loans, Credit

cards growth was the highest

at 27% YoY

Retail and services – key engines for growth

The retail (+17% YoY) and services’ (+24% YoY) sectors remained the key drivers of

loan growth as at Feb’19. Also, industrial growth picked up to 5.6% YoY (from 1.0%

in Apr’18). The share of retail in total systemic credit improved to 26% v/s 20% four

years ago. Retail traction for banks was driven by strong growth in credit cards

(+27% YoY), housing loans (+19% YoY) and other personal loans (+22% YoY). Further,

portfolio buyouts from NBFCs could have also contributed to the growth.

Lending to NBFCs improves to +3.2% MoM

Banks’ exposure to NBFCs grew at 47.5% YoY (+3.2% MoM) to 6.9% of overall credit

in Feb’19 (v/s 7.0% in Dec’18). Lending to NBFCs increased strongly until Sep’18, but

slowed thereafter due to liquidity issues (growth slowed to 4.4% QoQ in 3QFY19 v/s

18.4% QoQ in 2QFY19). Many banks in their recent result announcements

highlighted a cautious stance towards lending to select NBFCs, while confidently

continuing lending to strong parentage/better rated NBFCs.

Maintaining preference for AXSB, ICICIBC and HDFCB

The outlook for corporate banks is improving, given the moderation in slippages,

reduction in total stressed loans and improving profitability. We believe that revival

in credit growth, along with improved pricing power should help drive faster NII

growth. Among corporate lenders, we prefer AXSB and ICICIBC – we expect their

earnings to accelerate significantly from FY20 onwards.

Within our coverage

universe, we maintain our preference for ICICIBC, AXSB, and HDFCB.

Research Analyst: Nitin Aggarwal

(Nitin.Aggarwal@MotilalOswal.com); +91 22 6129 1542

Parth Gutka

(Parth.Gutka@motilaloswal.com); +91 22 6129 1567

Alpesh Mehta

(Alpesh.Mehta@MotilalOswal.com); +91 22 6129 1526

Himanshu Taluja

(Himanshu.Taluja@motilaloswal.com); +91 22 6129 1544

Yash Agarwal

(Yash.Agarwal@motilaloswal.com); +91 22 6129 1571

Investors are advised to refer through important disclosures made at the last page of the Research Report.

29 March 2019

Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

Explanation of Investment Rating

Investment Rating

BUY

SELL

NEUTRAL

UNDER REVIEW

NOT RATED

Expected return (over 12-month)

>=15%

< - 10%

> - 10 % to 15%

Rating may undergo a change

We have forward looking estimates for the stock but we refrain from assigning recommendation

Sector Update | Financials

* In case the recommendation given by the Research Analyst is inconsistent with the investment rating legend for a continuous period of 30 days, the Research Analyst shall within following 30 days take appropriate measures to make the recommendation consistent with the investment rating legend.

NOTES

Disclosures:

The following Disclosures are being made in compliance with the SEBI Research Analyst Regulations 2014 (herein after referred to as the Regulations).

Motilal Oswal Securities Ltd. (MOSL*

)

is a SEBI Registered Research Analyst having registration no. INH000000412. MOSL, the Research Entity (RE) as defined in the Regulations, is engaged in the business of providing Stock broking services,

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Disclosure of Interest Statement



Analyst ownership of the stock

Companies where there is interest

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to NASD rule 2711 and NYSE Rule 472 restrictions on communication with a subject company, public appearances and trading securities held by a research analyst account.

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Registered Office Address: Motilal Oswal Tower, Rahimtullah Sayani Road, Opposite Parel ST Depot, Prabhadevi, Mumbai-400025; Tel No.: 022-3980 4263; www.motilaloswal.com. Correspondence Address: Palm Spring Centre, 2nd Floor, Palm

Court Complex, New Link Road, Malad (West), Mumbai- 400 064. Tel No: 022 3080 1000. Compliance Officer: Neeraj Agarwal, Email Id: na@motilaloswal.com, Contact No.:022-30801085.

Registration details of group entities: MOSL: SEBI Registration: INZ000158836 (BSE/NSE/MCX/NCDEX); CDSL: IN-DP-16-2015; NSDL: IN-DP-NSDL-152-2000; Research Analyst: INH000000412. AMFI: ARN 17397. Investment Adviser:

INA000007100.Motilal Oswal Asset Management Company Ltd. (MOAMC): PMS (Registration No.: INP000000670) offers PMS and Mutual Funds products. Motilal Oswal Wealth Management Ltd. (MOWML): PMS (Registration No.: INP000004409)

offers wealth management solutions. *Motilal Oswal Securities Ltd. is a distributor of Mutual Funds, PMS, Fixed Deposit, Bond, NCDs, Insurance and IPO products. * Motilal Oswal Real Estate Investment Advisors II Pvt. Ltd. offers Real Estate

products. * Motilal Oswal Private Equity Investment Advisors Pvt. Ltd. offers Private Equity products

*MOSL

has been amalgamated with Motilal Oswal Financial Services Limited (MOFSL) w.e.f August 21, 2018 pursuant to order dated July 30, 2018 issued by Hon'ble National Company Law Tribunal, Mumbai Bench. The existing registration no(s) of

MOSL would be used until receipt of new MOFSL registration numbers.

29 March 2019