Banks : Some signs of life; but still weak | Sanctions made in the private corporate sector undertaken by banks/FIs - Kotak

Some signs of life; but still weak. RBI's recent release on project loan sanctions (private sector) by banks/FIs shows for FY2017 fresh sanctions at ~2.5% of loans (doubled yoy) but pending disbursements (1% of loans) suggest that loan growth will be fairly subdued as corporates continue to look at deleveraging activities. Cancellations have slowed down and there is improvement in ticket size as well. Infrastructure and construction sectors dominate sanctions. Near term focus on retail loans will continue.

Growth comes after a long period of consolidation, but remains well below peak levels

Overall fresh sanctions by banks/FIs for long term projects reported an impressive growth of 90% yoy. Note that FY2016 saw growth move to positive territory after a long period of decline and this sharp growth is giving some hope that we are probably past the weakest point in the investment cycle. Total sanctions are still low at ~2.5% of FY2017 loans but higher than 1.6% of loans in FY2016. From peak levels, sanctions for FY2017 are down by ~55% yoy indicating that the near term loan growth prospect still remains weak. ~60% of loans sanctioned continue to remain in infrastructure (power) but there is sharp recovery in the construction space. On the power side, we notice banks getting a bit more comfortable on the renewable space as compared to only thermal projects on which they focused earlier.

Retain our view that capex-led loan growth revival would be disappointing in the short term

We maintain our outlook that the loan growth on the corporate side, which is ~40-45% of loans for the sector, would be a challenge in the short term after adjusting for repayments or disintermediation of credit. Most corporates are focusing on reducing leverage levels through multiple options than looking at fresh capital expenditure. M&A activities can result in consolidation but will not revive loan demand. We have muted loan growth expectation in the medium term. Also, we don't see any immediate recovery in working capital loans given current inflation levels as well as possible improvement in working capital cycle as the economy shows gradual recovery. Loan growth in large corporate segment is below 5% yoy and broadly reflects the cyclical slowdown seen in FY1998-2005.

Fewer project cancellations; ticket size shows marginal tilt towards high value projects

One of the key positives that we see from the report is that cancellations of earlier announced projects have slowed down sharply in the past five consecutive years. FY2016 saw less than 5% cancellations or revisions as compared to 20-25% on projects announced in FY2008-11. This only gives confidence that promoters are taking a good view of the underlying business environment before investing in new projects. There is a marginal tilt towards large ticket projects.

Cyclical changes should see banks placing greater emphasis on building the retail portfolio

The shift to retail has begun with the share of retail loans increasing to ~22% in July 2016 from 18.3% in FY2014. We expect retail loans to grow at 17% CAGR over FY2016-20 and their contribution to overall loans to increase to ~25% of loans. As highlighted in the previous report, we expect this transition to be a lot more cyclical in nature than structural. As with most cycles, we don't see any immediate concern on the retail portfolio, especially when we look at the steady acceleration in loan growth and contribution to overall loans at this stage. This should give banks additional comfort to build business from this segment. The mix should change over time as banks look to build unsecured portfolio a bit more aggressively to offset the pressure on lending yields and take advantage of subdued credit costs in the short term.

Retail loan growth shines brightly in an otherwise dull growth environment

As highlighted in our previous reports, growth in retail loans is now on a strong footing except for a brief period during demonetization. FY2017 saw an improvement of 180 bps to 23% of loans and has recovered well from the bottom of the cycle at 18% of overall loans in FY2012. However, due to demonetization, overall growth slowed to 15-16% yoy from 18-20% reported in the past few years. Our broad outlook on sector growth remains unchanged that retail loans would be the mainstay of growth for the sector in the medium term.

Banks have altered their strategy to grow their loans in the retail portfolio for two main reasons: (1) corporate loan-book slowdown where we are now probably at the end of the trough period though recovery is likely to be anemic, in our view, as there has hardly been any large capex announcement in the private corporate sector and (2) retail loans went through a cyclical slowdown post FY2007, having gone through a period of strong growth after FY2002- 03. With rising NPLs and nascent analytical skills, most banks had to reassess their strategies. With a slowdown in the economy, most banks shifted focus to corporate loans from the retail segment. Over the past few years, retail consumer balance sheets have been far stronger than corporate balance sheets while better information availability of the borrower has resulted in negligible impairments in the period. This has instilled confidence in banks to shift focus to retail.

We expect retail loans to post 17% CAGR over FY2017-20

As per the last available data (July 2017), retail loan growth has slowed to 15% yoy but has recovered from the bottom low of 11% yoy that we witnessed post demonetization and this underlying growth has been relatively strong at 17-18% CAGR in the past five years as compared to 12-13% CAGR in FY2012-13. Housing loans grew 11% yoy and continues to have the largest share of retail loans at ~50%. The slowdown that we are seeing today is probably on account of RERA Act which has been implemented as well as the impact of GST which resulted in higher disbursements in earlier quarters. As indicated previously, most banks have now opened their unsecured loan portfolios, which resulted in faster growth as compared to secured loans. Outstanding receivables in the credit card business grew 32% yoy.

However, we do believe that banks should be able to grow their retail loans at closer to current levels. We expect retail loans for the banking sector to grow 17% CAGR over FY2016-20. As highlighted before, we have so far seen one complete cycle in the retail space-from FY2003 to FY2010. A large part of the slowdown is explained by the exit of ICICI Bank, a few quarters before the global financial crisis.

The next cycle probably started in FY2011-12 and there are early signs that trends in retail loan growth may accelerate henceforth. Housing loans, will remain the largest product offering for banks and is likely to grow at 15-17% CAGR in this period though the contribution from this portfolio is likely to decline to 49% from ~52% currently. Growth in vehicle loans should be comfortable at 20% CAGR considering that banks are re-entering new product segments, such as used vehicle financing. Credit cards or unsecured loans will see the fastest growth at 35% CAGR in the retail portfolio though its contribution from a size perspective would still be negligible at 5% against 3% currently. The size is insignificant, but we are still bullish about this space, considering it is expected to be a far more profitable portfolio than other products.

Demand for corporate loans remains fairly subdued

We maintain our broad view on the weak corporate demand outlook. We are still not too optimistic on loan growth as balance sheets of most corporates are still on the mend. The table broadly gives an indicative assessment of the weakness in capital expenditure. We do acknowledge that there are a large number of companies outside our coverage building assets at this stage, but we note that these companies too have indicated a similar view on capital expenditure. There is excitement that the investment cycle will come back, which would result in higher credit demand; we think this is sometime away.

The slowdown that started in FY1998 extended for nearly five years and we are broadly seeing something similar today. Loan growth in the corporate segment has slowed to 6-8% yoy, led by a large decline in the corporate segment. We are not giving the subsequent few years because there were two major events that drove growth, the reverse-merger of ICICI Ltd with ICICI Bank and IDBI Ltd with IDBI Bank. The two entities helped to show much stronger growth in subsequent years.

Also, working capital cycles have expanded in recent years, implying an improvement in the economy should initially result in lower working capital demand. Hence, our broad call is that we are likely to see fairly subdued corporate loan demand.

Source : Equity Bulls

Keywords