In the past decade, the banking sector saw rapid value migration in favour of private sector banks. The sector gained over PSU banks as loan market share rose to 36% in FY20 from 18% in FY10. Retail participation was crucial in this success story. Their share in credit expanded from 19% in FY10 to 26% in FY20.
Within the private banks, corporate-oriented banks struggled with a sharp deterioration in their asset quality. SBI, ICICI Bank and Axis Bank consumed 37-63% of the decade's cumulative PPOP in provisions on account of higher stress on their corporate book. It was in sharp contrast for retail-oriented banks like HDFC Bank and Kotak Mahindra Bank, who consumed only 10-15% of their PPOP towards making provisions.
Corporate Banks at Inflection Point
HDFC and Kotak Mahindra Bank continued to expand their profitability and market cap over the last decade on a strong performance of its retail franchise. Corporate banks like SBI/ICICI/Axis Bank, on the other hand, lost out on that front.
However, the cycle is fast changing for corporate banks. The adverse corporate asset quality cycle appears to have bottomed out. It is also visible in their solid earning performance and strong asset quality. These banks have also strengthened their balance sheets by making aggressive provisions and raising fresh capital to mitigate the pandemic impact.
Corporate banks are now well poised to drive growth due to high emphasis on economic recovery post-pandemic. The government is also prioritising the Capex intensive sectors like infrastructure and manufacturing sectors which augurs well for corporate banking stocks.
In the new decade, large private banks will continue to gain market share as PSU banks will fast move towards disinvestment. And private corporate banks are looking at a clear growth runway ahead of them as the Indian economy picks up momentum.
With the government promoting industries to fasten the recovery, the corporate cycle is also expected to turn. This is another inflection point where loan growth is likely to pick up for corporate banks after lying low for a decade. Credit growth decelerated from 22% in FY00-10 to 12% in FY10-20. It was at ~8% YoY over the past five years, considering the heightened asset quality-related concern.
