Banks share price target

Despite its sharp rise in recent months, the Indian banking sector is now tightening its seatbelt, as it flies into some turbulence. Concerns for the global economy are growing, with the rising death count in the Israel-Hamas conflict, the China slowdown and tight oil prices.

Banks’ sectoral credit deployment data for Sep’23 (as of 22 September, 2023) suggests non-food credit stands at INR 151.3trn. Adjusted for the merger [of a non-bank with a bank], systemic non-food credit stands at INR 145trn, up ~15.3% YoY/1.7% MoM.

The RBI governor, during Oct’23 monetary policy meeting, highlighted that the Indian banking system continues to be resilient, backed by improved asset quality, stable credit growth and robust earnings growth. However, he also mentioned that certain components of personal loans are recording very high growth.

The total value of credit card transactions rose by 32.2% YoY to Rs 1,48,984.8 crore in August 2023. The number of cards outstanding also increased by 17% YoY. Private sector banks grew by 37.1% YoY in terms of value of transactions.

Resilience is the name of the game in the world of Indian banking, far more than red hot growth, especially in the face of economic shocks. Despite ups and downs both global and local, Indian banks have come through relatively unscathed.

Monthly data on lending and deposit rates of scheduled commercial banks (SCBs (excl. regional rural banks and small finance banks) for Jul’23 suggests: 1) SCBs’ WALR on outstanding (o/s) as well as fresh loans inched up in Jul’23; 2) o/s WADTDR continues its upward movement, thereby resulting in spread compression; 3) rise in o/s WADTDR (7-8bps MoM) is much higher than the rise in o/s WALR (up 1-2bps MoM); 4) fresh WADTDR has been range-bound at 6.32-6.36% for the past 4 months and is clearly much below the Mar’23 high of 6.48%; 5) median 1-year MCLR for both PSB and private banks remains unchanged for the last two months.

Banks’ sectoral credit deployment data for Jul’23 (as of 28 Jul’23) suggests non-food credit stands at INR 147.8trn, up 19.8% YoY on reported basis. However, the reported July’23 data includes the impact of merger of a non-bank with a bank, hence is not comparable.

In the midst of global banks trimming costs and battling high interest rates, the Indian banking sector has held steady. Morgan Stanley recently ranked India as ‘overweight’ among emerging economies, with the financial sector a key driver for growth. The overall banking sector has stayed resilient even in the post-Covid period.