Banking December 31, 2019 Sector View Dominant PSBs, private banks remain structural picks Overweight The continued slowdown seen by NBFCs is seen enabling banks to garner a higher market share in advances, thereby growing at a relatively higher pace. Anticipated recovery in a large NCLT account, focus on retail segment and moderation in incremental stress assets will benefit PSU banks more leading to improvement in asset quality and, subsequently, reduce capital pressure. We retain our confidence in banks rather than NBFCs as balance sheet management and lower growth concerns will take two to three quarters to stabilise. Within private banks, we prefer Axis Bank and IDFC First Bank. Peaking of NPA cycle and resolution of large stressed assets Update Sector make dominant PSU banks a good investment opportunity. We prefer SBI in the PSU banking domain among our coverage. The report highlights three segments; Dominant PSU and large private banks as beneficiaries in current environment and will continue to outperform peers Evolving retail payment to provide impetus to credit card business Broking twist – Intensifying competition and tighter regulations by Sebi to lead to consolidation in broking industry. Large brokers to remain beneficiaries surviving competition and regulations. Dominant PSU, large private banks remain beneficiaries Factors favouring revival of dominant PSU banks Key beneficiaries of a decline in 10 year G-sec yields as interest rates are anticipated to structurally remain lower Improvement in IBC norms being a major reform, which is seen reducing recovery timelines thereby improving the overall recovery rate to ~50% vs. the earlier ~20-25% range Focus on retail segment by PSU banks is likely to propel advance Research Equity Retail growth and earnings trajectory. Top five PSU banks by advances – (SBI, BoI, Union, PNB) are focusing on the retail segment wherein the proportion has increased from 17% in FY16 to 24% in FY19 & 26% in H1FY20 (partially contributed by buyout from NBFCs) Research Analyst We expect below factors to pan out over the next couple of quarters. Kajal Gandhi Subdued private capex and higher stress in the corporate sector led [email protected] to sluggish credit growth in the last few years. While a gradual Vishal Narnolia Securities ICICI recovery is seen in the industry sector, traction in the retail segment [email protected] has remained consistent. Going ahead, the economic slowdown and Harsh Shah high base is seen keeping credit growth in single digits in FY20E with [email protected] a gradual recovery expected from FY21E onwards Resolution of large accounts like Essar Steel, Alok Industries and Bhushan Power & Steel along are expected to pare down industry GNPA to 7.1% though concerns on resolution of recently recognised RATING RATIONALE stressed companies remains a dragger. Recovery from resolution of large NCLT cases is seen providing a cushion against provision in lieu of recently cropped stressed asset Evolving retail payment to lead to healthy growth in credit card Focus on financial inclusion, improving granularity, digital reach by promoting non-cash transactions, retail online payment methods have been garnering strength; especially post demonetisation. With outstanding credit cards at 5.25 crore, annualised spend of ~| 7 lakh crore (as of September Sector Update | Banking ICICI Direct Research 2019), credit cards have been playing a dominant role in engaging substantial customers in digital payment arena that is seen growing further. Broking twist – tighter Sebi guidelines to lead to consolidation In the last six years, Indian markets have seen a spurt in volumes at ~34.4% CAGR in FY13-19. Derivatives witnessed robust traction at 35.4% CAGR in FY13-19 to | 959000 crore. Indian stock markets have undergone massive development over several years in terms of yields, products and customer services. In our view, Indian broking industry is set to see a gradual shift from transaction based model to service or fee based model offering services like wealth management & investment advisory. Focus on fund based activities including margin funding and loan against shares, which the brokers are currently engaged, is seen further increasing enabling brokers as avenue of contribution to earnings. To enable investor safety, Sebi has issued tighter guidelines that are seen leading to consolidation in the industry and large brokers gaining market share. ICICI Securities | Retail Research 2 Sector Update | Banking ICICI Direct Research Credit growth remains moderate; retail, NBFC in focus Slower economic growth & sluggish private capex kept credit growth on a moderate pace at 8.3% YoY in October 2019. Increased focus on retail lending and portfolio buyout from NBFCs provided some respite to overall growth. Though the second half of the fiscal remains the busy season for the lending space, previous year base is seen keeping advances growth in single digits in FY20E. Industrial sector growth stayed in single digits at 3.4% in October 2019 but saw some signs of improvement compared to the recent run rate. This is largely driven by infrastructure, engineering & chemical sector that grew 7%, 6% & 4% YoY, respectively. Within infrastructure, telecommunication grew 3.3%YoY, roads grew 3.6% while power grew 4.9%. Within engineering, other engineering grew at a healthy pace of 8.2% YoY. The services segment growth continued to decline at 6.5% YoY in October 2019, led by the economic slowdown. However, among constituents, growth in NBFC witnessed moderation at 26.8% in October 2019 vs. 29.2% in FY19. It still supported overall growth with bank lending to NBFCs and portfolio buyouts from NBFCs. Retail loan segment recorded an improvement in growth to ~17% YoY in October 2019 vs. 16% in FY19. Led by their cautious stance, moderation was witnessed in pace of personal loans and credit cards. In addition, slowdown in auto sales has kept portfolio growth in single digits. However, growth in housing loan continue to remain healthy at 19.4% YoY in October 2019, providing impetus to the overall pie. Going ahead, the large industrial sector is poised to grow steadily compared to the small & medium industry. The government’s focus on MSME is expected to push up disbursements. However, moderate economic growth and base effect is seen keeping overall credit growth in single digit in FY20E. With an improving credit scenario and shifting of credit demand from NBFCs to bank, we expect credit growth to improve from FY21E onwards. ICICI Securities | Retail Research 3 Sector Update | Banking ICICI Direct Research Exhibit 1: Credit growth supported by steady pace in retail portfolio | crores FY17 FY18 FY19 Aug-19 Sep-19 Oct-19 Non-Food Credit 70,94,490 76,88,423 86,33,418 85,32,367 86,20,329 86,63,557 Agriculture & Allied Activities 9,92,386 10,30,215 11,11,300 11,13,027 11,27,794 11,34,705 Industry 26,79,831 26,99,268 28,85,778 27,65,215 27,74,883 27,86,751 Large 22,05,296 22,22,589 24,03,878 23,01,894 23,08,566 23,22,175 Services 18,02,237 20,50,472 24,15,609 23,50,198 23,61,866 23,52,418 NBFCs 3,91,032 4,96,393 6,41,208 6,80,360 7,13,510 7,13,344 Personal Loans 16,20,034 19,08,469 22,20,732 23,03,930 23,55,785 23,89,684 Housing (Including Priority Sector Housing) 8,60,086 9,74,565 11,60,111 12,14,773 12,53,190 12,68,734 Credit Card Outstanding 52,132 68,628 88,262 97,650 99,372 1,05,026 Vehicle Loans 1,70,525 1,89,786 2,02,154 2,02,662 2,03,446 2,06,720 YOY growth (%) Non-Food Credit 8.4% 8.4% 12.3% 9.8% 8.1% 8.3% Agriculture & Allied Activities 12.4% 3.8% 7.9% 6.8% 7.0% 7.1% Industry -1.9% 0.7% 6.9% 3.9% 2.7% 3.4% Large -1.7% 0.8% 8.2% 5.1% 3.4% 4.2% Services 16.9% 13.8% 17.8% 13.3% 7.3% 6.5% NBFCs 10.9% 26.9% 29.2% 38.8% 30.5% 26.8% Personal Loans 16.4% 17.8% 16.4% 15.6% 16.6% 17.2% Housing (Including Priority Sector Housing) 15.2% 13.3% 19.0% 16.6% 19.3% 19.4% Credit Card Outstanding 38.4% 31.6% 28.6% 24.4% 25.9% 25.9% Vehicle Loans 11.5% 11.3% 6.5% 3.7% 4.1% 5.0% Proportion (%) Agriculture & Allied Activities 14.0% 13.4% 12.9% 13.0% 13.1% 13.1% Industry 37.8% 35.1% 33.4% 32.4% 32.2% 32.2% Large 31.1% 28.9% 27.8% 27.0% 26.8% 26.8% Services 25.4% 26.7% 28.0% 27.5% 27.4% 27.2% NBFCs 5.5% 6.5% 7.4% 8.0% 8.3% 8.2% Personal Loans 22.8% 24.8% 25.7% 27.0% 27.3% 27.6% Housing (Including Priority Sector Housing) 12.1% 12.7% 13.4% 14.2% 14.5% 14.6% Credit Card Outstanding 0.7% 0.9% 1.0% 1.1% 1.2% 1.2% Vehicle Loans 2.4% 2.5% 2.3% 2.4% 2.4% 2.4% Source: RBI, ICICI Direct Research Operation twist to provide treasury gains in quarter After a fall in yields in the first half of the year, G-sec yield saw a surge, rising ~ 53 bps to 6.78% from the lows of 6.25% in July 2019. In Q3FY20, RBI lowered its repo rate by 25 bps in October 2019 and maintained status quo in December 2019.