How to build a private banking market now that most of the revenue has gone out? How about a SWOT analysis?
Gaurav Kochar: So, in the banks that have reported numbers so far, the general trend is that liquidity remains tight, deposit growth this quarter has been low. Having said that, Q1 was seasonally weak in terms of deposit mobilization. Credit growth on a YoY basis remained stable. I would say 14-15% kind of credit growth at the system level. While we expect credit growth to slow this fiscal, as deposit growth is in the 10-11% bracket, credit growth is likely to end the year at around 13%.
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It has been known that credit growth will moderate since last year, we are talking about 16-17% credit growth, which has come down to 15% till the end of FY24 and now we are talking about 13-14% credit growth. This is one of the common phenomena in banks. The other is some normalization of asset quality. Although nothing alarming, in certain pockets we can see some slippages.
We will have to see if this continues in the coming quarters, as Q1 was seasonally weak in asset quality, especially on the retail side. We’ll have to wait and see for a few more quarters whether the numbers we’re seeing now are just a one-off or the trend is getting worse.
Will this pressure on franchise liability continue and will it have an impact on margins or do you think banks will be forced to increase rates?
Gaurav Kochar: Yes and yes. Pressure on margins continues. We spoke to the banks and they have confirmed that funding costs are the main challenge, especially since the mix in liabilities is …, CASA as a percentage of liabilities is down, which is an indication of tight liquidity. environment.
Funding costs are rising as we speak. The mix is ​​also shifting more towards term deposits and wholesale deposits, which will increase funding costs for banks. Having said that, the margins from where we’re looking at, if you look at the consensus numbers, we’re generally building for a decline in margins over the next few years driven by the funding squeeze, driven by the rate cuts that happened at the end of this fiscal and the overall mix in changing liabilities. So, the part is already in numbers. Whatever we have seen on the sidelines from the banks has been in line with expectations. But to answer your question, will this strength of liquidity continue, the answer is yes. Perhaps if you look at the liquidity tracker used for banks, the CD ratio is one of the ones used. If you look at the CD ratio at the systemic level, it is at 78-79%. In general, if I look at the historical data of the past 10-20 years, here this number has peaked, after two things have happened, either the loan growth has decreased or matched the credit growth, the deposit growth has to be chosen. rise which again will show that the price of deposits can continue to rise to meet credit demand. So, to answer your question, yes, liquidity strength will continue in the near term.Are you talking about all this in the background of RBI circular?
Gaurav Kochar: That’s different. Coming to the circular, when this is a draft guideline, the draft circular, we have to wait and see how the final paper comes in. But maybe this is perhaps in the background of what happened. We all thought this was because of what happened at Silicon Valley Bank in the US and there was liquidity in the bank. If we look at Indian banks, when I know that Indian banks are placed differently, if we look at the balance sheet, what happened with SVB more than ALM mismatch.
They borrow short and invest in long-term securities. In India, if I look at Indian banks, almost a quarter of their balance sheets are liquid assets. So, that will be very different. We have brought a lot of liquidity on the balance sheet. But perhaps we have seen the RBI become more proactive in these matters, be it on the asset quality side or on the liquidity side. To some extent, maybe this has come from that, that the liquidity on the balance sheet should be a little more tighter, a little more liquidity on the balance sheet.
If I look at the total liquidity covered today, most banks have reported a liquidity coverage of 110 to 120, 125 percent and if I consider that the draft guidelines will be implemented, it has an impact of around 10 to 15 percent. point in the banks’ liquidity, which means to maintain the current level of liquidity, they must increase liquidity by another 10-15%, which will not be clear 1-1.5 percentage points of the type of deposit growth more than the current level. or maybe 1-1.5 percentage points of lower credit growth because in the end that money will be used in liquidity.
So, 1.5 percent of higher deposit growth or 1.5% lower credit growth will have some impact on overall earnings. Different banks will see different challenges, but on a broader scale, I would say 3% to 5% will have an impact on overall bank earnings because of this if it is implemented.
Which banks do you think will benefit in this kind of environment?
Gaurav Kochar: For banks with strong liability franchises, large private banks, large PSU banks, deposit mobilization is not a big challenge. While the challenge is real for all banks, but the larger banks are relatively more placed in this given that they have distribution and they have a system in place to grow deposits, while small banks have to play the rate game, will have to raise rates better to give a little more delta over the big banks to get more deposits. So, the cost of funding will be the main differentiator in this cycle.
Finally in a cheap and attractive financial place – insurance, brokerage, private bank? What do you think fits the piece?
Gaurav Kochar: Valuations for the sector as a whole are still relatively light. I will not say they are rich, blocking some pockets in the capital market space, and rightly so. The growth there is better. The capital market is a bit rich on the value side. But having said that, if I look at banks or private banks as a whole, most of them are trading in pre-COVID numbers.
The long-term average may be just above the long-term average. So, it costs quite a lot. If I look at the credit cycle, the credit growth, the return ratios – ROA and ROE – track well. We are probably in a more decadal return ratio. So, in that context and given mild credit growth in double digits, valuations look very comfortable for private banks in particular. Coming to insurance, again, insurance is lacking. If you look at the last few years, they did not give much return.
But it has been said that I look at the return on the attached value, the ROEV for them is quite strong. Growth, despite all the challenges that we see on the macro side both in front of regulation and tax tweaks that the government did in last year’s budget, which, still growth looks quite good in the early teens to the early to mid-teens type of volume growth for insurance and in in that context, the price seems quite stable. The re-rating of the value for the sector should continue.
