HDFC Bank
HDFC Bank
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The private banking space is entering a golden period in India. As per a Motilal Oswal report, their share in total banking credit is expected to increase to ~45% by FY25E. It also expects RoEs of large private Banks to improve to a decadal high of 16.3% by FY23.

With bad bank under implementation, the focus is fast shifting from asset quality issues towards strong growth opportunities.

It is going to be a major driving factor for all the large private banks and SBI.

Large Banks have made strong provisioning during large parts of FY21. They have also raised the highest amount of capital. It will equip them for a sustained turnaround. It will also enable them to accelerate market share gains.

Credit cycle picking up, larger players at forefront:

The report indicates that ~57% of incremental loan growth was driven by SBI, HDFC Bank, and ICICI Bank during 9MFY21. These banks reported loan growth of 3-7% QoQ in the December quarter. Government-backed Emergency Credit Line Guarantee Scheme (ECLGS) played an instrumental role in credit growth during the quarter. ECLGS disbursements formed 45% of FY21 YTD incremental loans.

Credit growth in many business segments has crossed pre-COVID levels. And, momentum is expected to remain strong. The systemic loan growth is expected to remain ~11%/13% in FY22/FY23.

Covid stress receding:

In a major relief to the banking sector, the Supreme Court has refused to extend the moratorium period beyond six months. It will compel the borrowers under moratorium to start repaying at the earliest.

Large banks have managed to keep their collection efficiency steady during this period. Now, with the Supreme Court's favorable decision, the CE will improve further. With this, high provisioning requirements are expected to recede going ahead. It will aid credit cost normalization for larger Banks over FY22E/FY23E. However, elevated provisioning requirements could continue for mid-size banks like RBL, Bandhan, and DCB.

The banks have also done well with no major worry appearing on slippages/restructuring front. Restructured books across all large banks stood in 0.3-0.8% range. The outlook remains in control with slippages expected to normalize from FY22E onwards.

Odds in place for earning upgrade, RoEs to touch decadal high:

Bank earnings are poised to take off with asset quality-related fear subsiding. Growth momentum across many business segments is touching pre-COVID levels. With that, all large banks are poised for earning upgrades in the near to mid-term.

Steady revival in credit growth, improvement in margins due to the reduced liquidity on balance sheets and continued moderation in funding cost are the other major enablers for earning revival in the banking system. The combination of all these factors will drive RoEs upward.

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