“After a long asset quality cycle, their balance sheets are now healthy enough to start growing again.
Overall, this will likely drive system loan growth to improve sustainably to trend 12-13 per cent levels (from 10 per cent now),” said Anand Swaminathan, Research Analyst at Merrill Lynch, a subsidiary of BofA.
He said, for private banks, this could mark the end of easy market share gains on both sides of the balance sheet. “Liability will become a key structural issue/driver through FY23, especially in the context of tightening system liquidity. Private banks will likely look to offset this risk by growing more aggressively on the asset side,” he added.
For over a decade, private banks have been eating into the market share held by public sector banks.
But it may be a time for public sector banks to fight back as key drags have been resolved. Moreover, consolidation in the space will also likely start bearing fruit.
Swaminathan recommended investors buy
and . “We reiterate our positive view as we expect valuation re-rating on continued improvements in growth-ROE profile (could surprise positively on growth and asset quality in FY23). Also likely to benefit more from capex cycle,” he said in a note published on Monday.
The foreign brokers counted six pointers to make a case for the public sector banks:
-Loan growth: Highest since FY14 with convergence – PSB’s aggregate loan growth in FY22 improved to 8.8 per cent (versus private banks at 16 per cent) – the highest since FY14. More importantly, growth across PSBs was more broad-based across segments.
-Deposits: PSBs back in action in 4Q – the key change in the latter half of FY22 was the increasing focus on liability growth by PSBs. PSBs deposit base grew 8.4 per cent YoY in FY22 and 5.2 per cent QoQ in 4Q’22.
-NIMs: Back to decade highs – thanks to improving loan growth and asset quality, other PSBs saw continued NIM improvements, taking them to decade highs.
-NPA coverage at 75 per cent: – better than pvt banks – PSBs have continued to focus on increasing their coverage ratios – taking them close to all-time highs.
-Capital: All improving, but
lagging PSB peers – SBI’s CET1 ratio barely changed at 9.9 per cent while other PSBs saw broad-based improvement take the aggregate to 11.9 per cent.
-Return ratios still remain sub-par: All below CoE – Despite lower capital levels, PSB ROEs are still sub-par and below cost of equity. The key drag is from lower NIMs and higher credit costs – likely to improve from FY23 as both improve.
On the other hand, there are two negatives that it outlines for private banks:
Liability: A zero-sum game – negative for private banks. Tighter liquidity conditions, plus a more aggressive PSB sector, could meaningfully impact access and cost of funding for Pvt banks – a big tailwind over the past 5-6 years.
-Asset side: Pricing pressure on mortgages/corporate. While we are less worried on the asset side, the margin pressure on corporate and mortgage books will likely increase further.