Banks - Surprising but unsustainable - Sector Update - HDFC Securities

Contrary to our expectations, non-food credit grew 7.6% YoY in Mar-20 (vs. 7.3% in Feb-20). Further, MoM growth came in at 4.2% (vs. 3.9% in Mar-19). The increase in Mar-20 accounted for 57% of the increase in FY20. While Mar has a/c for an increasing proportion of incremental (annual) non-food credit, the persistence of this trend in FY20 is surprising, in light of COVID-19 related disruptions. Much of the growth in Mar-20 was supported by credit for industries and services (~87% of incremental Mar-20 credit).

Industrial credit grew at 1.4/4.8% YoY/MoM (vs. 4.2% MoM growth in Mar19), led by 1.3% YoY growth in credit to large industries (5.2% MoM, ~83% of industrial credit). Within industrial credit trends, sectors such as petroleum, coal and nuclear products (29.3% MoM), chemicals and chemical products (10.7%, led by fertilisers) and telecom (2.6%) stood out.

Growth in credit for services accelerated to 8.5% YoY, vs. 6.9% in Feb-20 but was substantially slower than 17.8% in Mar-19. Seemingly relatively risky sectors continued to witness rapid growth (NBFCs +27.7/16.4% YoY/MoM, CRE +13.7/0.5%, and now tourism, hotels and restaurants +18.4/2.2%).

While YoY growth in personal loans was strong at 15.7%, growth here appears to be slowing. MoM growth at 1.4% was slower vs. Mar-19 (2.7%) and Mar-18 (2.9%). Growth in credit card debt came in at 22.5% YoY vs. 33.0% YoY in Feb-20, with slight MoM de-growth vs. 5.8% MoM growth in Mar-19. Home loan growth slowed to 16.3% YoY (the slowest since Sep-18).

These seemingly anomalous trends may be a consequence of (1) Substantial portion of industrial and service growth coming towards the end of the year (as seen earlier too), (2) Higher than usual utilisation of undrawn limits by corp and SME borrowers, and (3) Possibly reduced demand and higher risk aversion by banks towards personal loans.

The bump up in non-food credit growth is unlikely to sustain, given, (1) The growth arising from higher utilisation of undrawn limits is likely to be 'one time', (2) Demand for personal loans which has been supporting overall credit growth is likely to see a significant fall, which will not be compensated for by growth in other segments, and (3) Banks are likely to turn more risk averse. Our coverage banks reported a credit growth of ~16% over FY16-19 vs. nonfood credit growth of ~10% over the same period. We expect our coverage to exhibit a ~7% credit growth over FY21E.

Source : Equity Bulls

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