Bank Loan Growth Surges as Margins Eye Recovery: IIFL Capital
IIFL Capital reports strengthening loan growth and recovering margins for Indian banks, despite challenges in deposit competition.
The Indian banking sector is gearing up for a period of strengthened Indian bank loan growth and a gradual recovery in margins over the next few quarters. According to a comprehensive report by IIFL Capital, which analyzed the July-September quarter results for FY27, the sector is seeing a positive shift in retail lending momentum and robust demand for corporate credit.
The Push in Retail and Corporate Lending
The report highlights a meaningful pickup in retail disbursements, suggesting that retail growth is poised for an upward trajectory. This trend, combined with a healthy appetite for corporate loans, has driven significant expansion across major lenders.
The numbers reflect this surge in activity:
- ICICI Bank led the charge with a massive 30 per cent year-on-year growth in advances.
- Axis Bank reported a strong growth rate of 23 per cent.
- HDFC Bank saw its advances rise by 16 per cent year-on-year.
Notably, HDFC Bank's retail loan growth improved to 8 per cent year-on-year, up from 7 per cent in the preceding quarter.
The Margin Battle: A Varied Recovery
While the outlook is positive, the recovery of Net Interest Margins (NIM)—the gap between what banks earn from loans and what they pay on deposits—will not be uniform. IIFL Capital suggests that the pace of recovery will depend on each bank's specific loan mix, funding costs, and how they deploy newly raised deposits.
Bank-Specific Outlooks:
- HDFC Bank: Management believes margins hit their lowest point in the September quarter and are expected to improve gradually, aided by recent rate hikes and lower funding costs.
- ICICI Bank: The outlook is slightly different here, with management anticipating a further decline in margins during the December quarter, with a recovery expected to begin from the March quarter. The report mentions that the impact of foreign currency non-resident (FCNR) deposits will become more apparent in the coming quarters.
Asset Quality on the Rise
A silver lining for the sector is the visible improvement in asset quality, which is providing a solid foundation for earnings. At Axis Bank, for instance, the credit cost dropped by 20 basis points sequentially to 51 basis points. Furthermore, gross and net slippage ratios saw an improvement of 30-35 basis points.
Crucially, IIFL Capital points out that this improvement in credit costs for some lenders is driven by a decrease in the formation of new bad loans, rather than being the result of one-time recoveries.
The Roadblocks: Deposits and Fee Income
Despite the optimism, the report warns of significant headwinds. The primary concern remains deposit mobilisation. Banks are facing intense competition to attract deposits, and there has been a structural slowdown in the growth of current account and savings account (CASA) deposits at several institutions.
This struggle for deposits, coupled with pressure on fee income, could potentially slow down the improvement of funding costs. The report concludes that the ability of banks to maintain high credit growth while expanding their margins will ultimately hinge on their success in mobilizing deposits, managing liquidity, and maintaining stable asset quality in the quarters to come.