Banks : Retail loan growth: the only game in town - Kotak

Retail loan growth: the only game in town. FY2016 data reaffirms our broad hypothesis that private banks continue to focus on retail loans to drive growth. However, the growth was balanced between average ticket size and volume for FY2016 although the past 5-year data was skewed more towards increase in average ticket size. The initial discussion of GST appears to show promise for lending to SME/self-employed. Margin compression, however, remains a big risk.

Trends continue to favor a favorable outlook for retail and private banks

The key takeaways from the recently released RBI report on loans for FY2016: (1) retail continues to outshine corporate loan growth by a wide margin but demonetization had an impact on loan growth in FY2017 (see Exhibits 2/3), (2) private banks continue to expand market share within retail (see Exhibit 25), (3) South and West continue to dominate the retail lending business, (4) loan growth, especially in housing and auto loans, is moving beyond urban markets (see Exhibit 15), (5) reversing trends, growth was driven by a mix of volume and average ticket size and (6) interest rates fall continues across all retail products.

Retail loan still a play on increase in average ticket size rather than volume growth

Retail loan, which grew by 15% CAGR since FY2011, is still a play on increase in ticket size rather than volumes. 95% of growth in the past five years is driven by increase in average ticket size in overall retail loans while the same is 66% and 90% CAGR for housing and auto loans. The lull in lending post the global financial crisis and the rapid increase in asset values during FY2010-13/14 are helping banks deliver relatively easier growth today. Auto is seeing a shift in business from entry-level segment to mid-market products. Finally, duration is playing a big role although it is hard to quantify as it is a hidden variable that is driving growth. We see a fair amount of advertising for 30-year housing loans and 7-year auto loans in the market.

GST: shows promise for a stronger credit growth ahead led by SME and self-employed

As the organized segment starts to gain market share, we see a strong opportunity emerging in loan growth, which has been tepid in the past few years. With greater availability of information, we see SME and self-employed segments, where banks have shied away from lending so far, to be key growth drivers for banks. Banks probably need a full cycle of data, which implies we could look at FY2019 as a period where growth shows a fair amount of acceleration from current levels. There would be a bit of challenge in the initial years as certain segments of business can result in higher NPLs. However, this should not impact private banks as it is not a key area of focus.

Yield compression remains a big risk while growth outlook is relatively better

The lack of strong loan growth, negligible impairments and abundant liquidity indicate that banks would continue to lower the spread across all products. Exhibit 69 shows the pace at which loans have started to compress across most retail products. We maintain our negative outlook on NIM, especially for the frontline private banks.

South and West dominate ~60% of business; Maharashtra maintains its share at 18%

FY2016 saw no major changes in the underlying trends. South (38% of retail loans, declined 90 bps yoy) and West (25% of retail loans, increased 90 bps yoy) continued to dominate the retail portfolio. Maharashtra retained its market share at 18% of loans while Karnataka is second at 11% of loans, displacing Tamil Nadu after nearly a decade. Mumbai remains the largest market for housing loans but Karnataka has displaced Tamil Nadu to emerge as the second largest market for retail loans.

Source : Equity Bulls

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