Retail loans likely to aid banks’ loan growth in Q3, asset quality expected to improve

By Piyush Shukla

Banks will likely report a gradual rise in loan growth in the December 2021 quarter, led by demand for retail loans, analysts expect. Lenders’ asset quality will also likely remain stable in absence of chunky corporate slippages in the reporting quarter, they believe. However, the fast-spreading Omicron variant of Covid-19 poses a threat to banks’ credit growth and asset quality prospects in January-March quarter (Q4).

Kotak Institutional Equities Research said it expects loan growth recovery for the sector to be gradual. Within retail credit growth, the self-employed segment will need time to become comfortable with leverage, while mortgages are likely to have a meaningful share of incremental retail credit and consumption-linked credit is likely to grow faster. Despite bankers talking about fresh project proposals from the corporate India trickling in, corporate loans will take some time to ramp up meaningfully, it added.

“It should be a good quarter (for credit growth) because of festive season demand and the fact that new cases started rising only from last week of December onwards. The sectoral credit deployment data from Reserve Bank of India (RBI) also suggests that credit offtake numbers are good,” said Karan Gupta, director-financial institution at India Ratings and Research.

Motilal Oswal, in pre-earnings note, said that retail and small and medium enterprise (SME) segment is likely to show strong recovery, although growth in the corporate segment would remain soft. The brokerage expects ICICI Bank to deliver 15% year-on-year (YoY) loan growth in Q3, Kotak Mahindra Bank to report 17% growth, Axis Bank’s advances to rise by 11% and HDFC Bank and IndusInd Bank to report 15.7% and 11% rise in total advances for the quarter ended December, respectively. “…We expect NII (net interest income) growth of 14% YoY, with ICICI Bank at 23%, HDFC Bank at 14%, IndusInd Bank at 12%, and Kotak Mahindra Bank and Axis Bank at 10% each,” it said.

Deposit growth is expected to outpace credit growth with share of low-cost current account and savings account likely to improve for most players in the present low interest rate environment. “There will not be much change in margins as some banks did make deposit rate hikes but towards the end of quarter so impact of the same on net interest margin (NIM) would be minimal,” Karan Gupta said.

On asset quality side, slippages and credit cost will likely see sequential improvement in October-December, although analysts will eye management commentary on the performance of advances extended under emergency credit line guarantee scheme and monitor trends in the restructured, microfinance portfolios of banks.
KIE said retail book will be the major driver for slippages in reporting quarter and on the corporate front, credit quality seems to have improved as upgrades by rating agencies have outnumbered downgrades meaningfully in the past few months.

“The asset quality numbers are expected to improve sequentially driven by the overall improving trend in economic activity and collections from borrowers. The credit cost may however rise on sequential basis in absence of any large recoveries as was seen in Q2 (July-September) from DHFL (Dewan Housing). We will monitor the progress of the banks on the performance of the overdue loan book and the restructured loans as these continue to be the key risk for the asset quality and earnings,” said Anil Gupta, vice-president of financial sector ratings at ICRA.