Retail loan growth will continue to remain far from encouraging for banks

Retail loan growth at 9.1 per cent for February 12 fortnight is the weakest so far; Nifty Bank index is up 60 per cent in six months

Loan growth trajectory of banks usually mirrors the country’s GDP (gross domestic product) numbers and this is why bank stocks are often seen as a proxy of economic growth by the Street. However, the recently published GDP data for December quarter (Q3) saw stronger than expected recovery, while the Reserve Bank of India’s data on credit deployment data for the fortnight ended February 12, with 6.6 per cent year-on-year was far from encouraging.

The retail segment (accounting for a fourth of total loans) posted a meagre 9.1 per cent growth – weakest so far in FY21, suggesting that the banking sector’s risk aversion doesn’t seem to be fading. “With the government’s focus on infrastructure in the recent budget, the question remains whether banks will participate in the long-term infra funding segment this time around and whether this can lead to an improvement in the credit to GDP multiplier, as seen in the past,” Suresh Ganapathy of Macquarie questions.

Delving into specific pockets of retail loans depicts a more unnerving trend.

The overall retail loan growth was at a 10-year low with credit card outstanding increasing by just 5 per cent year-on-year and vehicle loans by 7.1 per cent year-on-year for the fortnight. Despite talks of a pick-up in residential real estate, including affordable housing, the segment’s growth at 7.7 per cent came in at 129 months (or nearly 11 years) low, according to HDFC Securities. Unsecured personal loans growth decelerated to 12.1 per cent as against the FY21’s average of 13.6 per cent.

Clearly, the data points to another quarter of pale growth. FY21 so far has seen a loan growth of 6 per cent, while the Street has estimated 7 – 9 per cent growth this fiscal. Forecast for FY22 is a lot stronger at 12 – 15 per cent thanks to optimistic management guidance. However, with the growing disparity between estimates and reality, the numbers could be revisited in April, post Q4 results.

“Building a high loan growth estimate for FY22 is still not a well-developed argument as conditions continue to point towards a deleveraging cycle either for large corporates or micro, small and medium enterprises (MSMEs),” analysts at Kotak Institutional Equities point out. They add that while retail credit appears promising, it is yet to translate in headline growth despite healthy transaction in real estate and recovery in MSME segment may be the slowest.

“Slower than expected growth may make it difficult for banking stocks to defend valuations,” said an analyst with a foreign brokerage. The Nifty Bank index is up 15 per cent year-to-date in 2021, and over 60 per cent in the past six months.

For now, bets are high on ICICI Bank, State Bank of India and HDFC Bank. A full-blown recovery would be imperative for confidence to return on the sector as a whole.