Analyst Corner: Fair chance that banks cut deposit rates further

We analyse three sources of data released recently by the RBI reflecting on latest growth and asset quality trends. Sectoral composition of credit, report on trends and progress of banking and the Financial Stability Report form the basis of the following observations.

Loan growth for the system remains dull at 8.4% YoY as also YTD growth at 3%. Slower loans to services (NBFCs) and loans to medium industry are the culprits. The adverse base for services is likely to remain until March 20. Liquidity remains abundant at Rs 3 lakh crore and the deposit growth too is buoyant.

With excess SLR in the system remaining elevated at ~800bps, there is a fair chance of further deposit rate cuts by banks, more likely PSUs. PSU banks ex-SBI have lost significant incremental loan share to pvt banks while SBI’s share has remained steady. RBI data indicate a ‘flight to safety’ as banks reduce their loan tenors, skew their lending towards larger corporates and reduce their risk-weighted assets.

As a result, asset quality data indicate incrementally improving trends as slippages reduce, as do gross NPAs (particularly for industrial loans). Recoveries improve, aided by the bankruptcy law. However, it is too early to predict a sustainable improvement in asset quality unless macroeconomic conditions improve.

While growth recovery does not appear to be on the horizon, an asset quality recovery does. We continue to prefer banks with smaller balance sheets facing relatively lesser issues on growth and asset quality. Our preferred play remains Bandhan Bank.