Banking sector weathered it all. May it be many years of glorious growth, storms of competition, NPAs, regulatory compliances or sobering credit cycles. Banking remains the backbone of Indian economy and capital markets.
Banking has one of the highest weight in Indian equity markets and also deep linkages with the economy.
Banking contributed more than 50% of incremental financial resources to commercial sector annually. This share has fallen to 40% over the last 5 years.
Banking contributed more than 50% of incremental financial resources to commercial sector annually. This share has fallen to 40% over the last 5 years.
Recent challenges -
1. Slower Growth.
2. Policy Changes.
3.Npa Cycle
4.Digitization & Technology change.
1. Slower Growth.
2. Policy Changes.
3.Npa Cycle
4.Digitization & Technology change.
The reason for falling market share were either induced by banking environment or credit demands being met by foreign markets with low interest rates.
The situation is surely changing & you will see gradual uptake in banking sector credit demand.
The situation is surely changing & you will see gradual uptake in banking sector credit demand.
Reasons supporting the above argument are improving Capex cycle, China +1 Policy, clean & well capitalised balance sheets, regulations are clear & tighter.
So well governed banks will be benifit.
So well governed banks will be benifit.
As regulations starts supporting banks, the banking appetite will increase & we may see CY 22 will start seeing heightened growths. Factors leading to slower credit growth are slowly fading away.
Challenge for Investors in Banking?
The sector has underperformed since covid. We entered pandemic with 7 to 8% growth & its still the same. Numerous disruptions and economic volatility has caused credit demand to taper off. Liability side has also seen huge volatility since 2018
The sector has underperformed since covid. We entered pandemic with 7 to 8% growth & its still the same. Numerous disruptions and economic volatility has caused credit demand to taper off. Liability side has also seen huge volatility since 2018
Going forward in FY 22 with improving credit growth, better asset quality & reasonable valuation is expected to help in alpha generation.
Retail or Corporate what will drive the banking credit?
Retail will continue to be in flavor. India is still underpenetrated. If we see 7 to 8% GDP growth for next few years, retail credit growth shouldn't be a worry. Retail have become more sensitive to their own credit scores.
Retail will continue to be in flavor. India is still underpenetrated. If we see 7 to 8% GDP growth for next few years, retail credit growth shouldn't be a worry. Retail have become more sensitive to their own credit scores.
Banks are largely addressing organized sector which is not seeing large stress. Banks have very limited exposure to unorganized segment which has seen maximum stress. So the size of this problem may not be very large.
Are we seeing emergence of Capex cycle?
Govt spending has gone up on Capex. Demand from consumers have also improved. Manufacturing is leading the demand for credit. Enquire for credit has gone up two times, that too from manufacturing.
Govt spending has gone up on Capex. Demand from consumers have also improved. Manufacturing is leading the demand for credit. Enquire for credit has gone up two times, that too from manufacturing.
National Infra pipeline of 100 lakh crore for next 5 years could be a meaningful capex driver. Proposed plan around electrification, power distribution, alternate energy are looking positive enablers. Balance sheets of both banks & Corp are looking good.
If we are assuming higher rate of GDP & development to be inclusive. Most project that are announced & reforms are Infra focused. China+1, PLI all indicates meaningful investments in Capex. All these aspects indicate conducive conditions for capex are present.
How are Profit pool shaping up?
Profit pool of all lenders till FY 15 was 1.5 lakh Cr annually which was growing at 18% CAGR for 9 to 10 years. From Fy 15 to 19 it went down to 30000 cr.
This number is up 3x in FY20 & by FY21 we may move back to FY15 levels.
Profit pool of all lenders till FY 15 was 1.5 lakh Cr annually which was growing at 18% CAGR for 9 to 10 years. From Fy 15 to 19 it went down to 30000 cr.
This number is up 3x in FY20 & by FY21 we may move back to FY15 levels.
Asset base has also improved by 50%. So we see very sharp acceleration in profits in FY22 & 23. The sector appears to be on a clean footing and with a clean runway ahead.
The Fintech threat?
In general Fintech need banking platforms & banks need good distribution so the collaboration between both is good. Regulations are still not supporting fintech to operate alone & it may not change anytime soon. Banking remains the central driver for growth.
In general Fintech need banking platforms & banks need good distribution so the collaboration between both is good. Regulations are still not supporting fintech to operate alone & it may not change anytime soon. Banking remains the central driver for growth.
Both will co exist. The divide in India is not just economic or age but there is a digital divide too. Its not easy and definitely not in near future that India's brick and mortar banking structure will evaporate to completely digital structure.
Digital definitely is the way ahead but it will eventually catch pace. Human touch & need for physical engagement will not diminish, for now.
Will Banking & Finance face challenges from New edge technology?
Profit & Loss dynamics may change but pools may not change. As technology evolves & credit standards improve the credit cost will moderate. In most western markets even in happy cycles the credit costs are lower.
Profit & Loss dynamics may change but pools may not change. As technology evolves & credit standards improve the credit cost will moderate. In most western markets even in happy cycles the credit costs are lower.
Profit pools are influenced by Margin, Cost & Credit cost so dynamics can changes. So look at mix of profit pool & returns. No need to worry as long as core for Fintech & modern payments is going to be banking platforms. We may see lot of partnership between both.
Challenge from financialization of savings(Money moving to mf's, capital markets?
The challenge will continue. Don't just look at cost but cost of deposit. Banks will have to keep on adding customers through new partnerships. Will have to look at expansion online or traditional
The challenge will continue. Don't just look at cost but cost of deposit. Banks will have to keep on adding customers through new partnerships. Will have to look at expansion online or traditional
Overall the trend appears to be improving for the Banking industry and a difficult phase is coming to an end with brighter times ahead.
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