CLSA on Indian banking sector's fundamentals

CLSA on Indian banking sector's fundamentals

After suffering from seething government and disturbing bad loan difficulties, Indian banks have established themselves in a much stronger position, as balance sheets and profits have rebounded markedly, noted CLSA (formerly known as Credit Lyonnais Securities Asia), a capital markets and investment group.

"We believe Indian banks are well placed after a rollercoaster decade. Balance sheets are the strongest they have been in over a decade, and profits have rebounded sharply (quadrupling in 10 years)," the firm added in its observation.

It further added that the return on equity (ROE) of the Indian banking sector is the highest since the financial year 2011.

Deposit growth should coincide with the acceleration of loan growth, which increased from 10 per cent to 15 per cent on average over the previous two years during FY12-22, it added.

Mentioning the favourable conditions in the sector, the firm anticipated that the private sector banks, which haven't performed well in the stock market in recent times, are expected to give better returns because of the positive business outlook.

In the past year and over the last five years, public sector banks have done much better than private sector banks, the firm observed.

However, it was also noted that in the past decade, the private sector banks have outpaced PSU banks in current account (CA) deposits by a margin and have also pared down non-deposit borrowings.

Highlighting the net non-performing loans (Net NPL), which was once a widely discussed issue, the firm noted that it has declined to decadal lows, driven by better asset quality, stronger provision buffers, and an improved capital position.

PAT for the sector has rebounded sharply and has quadrupled over the past decade. The banking sector's ROE of 15 per cent is the highest since FY11.

As per the observation of the firm, the loan growth in the sector has picked up from a decadal average of 10 per cent to 15 per cent over the past two years driven by all sub-segments and possibly some shifts. from corporate bond substitution.

Over a long time-period, loan growth and deposit growth have been in sync. The quality of corporate credit, too, has improved over the past 5-7 years, the firm underlined.

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