Private banks see strong loan growth in Q2 led by retail, margins under pressure

Private banks posted another quarter of healthy results in Q2 FY24 on the back of strong growth in retail, MSME and mid-corporate loans even as margins remained under pressure sequentially due to continued rise in cost of funds.

Retail credit growth was led by the unsecured loan segment, with large lenders posting an over 30 per cent increase in their personal loans and credit card portfolios. Secured loans such as housing and small business loans also continued to perform well.

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Amid rising concerns regarding the unprecedented pace of growth in these segments, several lenders such as ICICI Bank and Kotak Mahindra Bank flagged rising delinquencies in the low ticket segment of less than Rs 50,000. They said that their exposure to these segments remains nil to minimal and that much of their advances are to existing bank or high credit score customers. YES Bank said it is seeing a rise in defaults in the 30 dpd (days past due) bucket but that it remains manageable, whereas Kotak Bank said that the risk-reward for the segment is still favourable.

Banks said they continue to monitor these portfolios closely and are making adequate provisions for any troubled accounts. In absolute terms, this segment accounted for a bulk of incremental slippages for most banks, with RBL Bank strengthening underwriting to fully provide for unsecured retail loans that are 120 dpd (days pastdue) instead of the earlier 180 dpd.

• Also read: Bank credit growth moderates in Q2, deposit growth matches pace

On the corporate side, most lenders highlighted strong demand from the MSME and mid-corporate segments whereas demand from large corporate remained weak. ICICI Bank said the capex cycle has largely been led by government spending, especially in infrastructure and industrials. On the other hand, private capex remains weak as companies are deleveraged, have strong balance sheets, and are able to fund incremental brownfield investments through internal accruals.

YES Bank and Kotak Bank said that pricing competitiveness in corporate loans continued to be high. Axis Bank said that demand from corporates is steady, both from a working capital and term loan perspective, and that the bank sees good opportunities in private capex.

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Margins were steady to low for most private banks, largely due to the lagged impact of repricing of the deposit book. IndusInd Bank’s margins were flat. whereas Axis Bank and Federal Bank, which had seen higher compression than peers in the previous quarters, posted a slight rise owing to a simultaneous increase in the yield on interest-earning assets, which off-set the pressure on margins. However, most banks expect margins to start normalising in the coming quarter.

IndusInd Bank, ICICI Bank, HDFC Bank, and Federal Bank were analysts’ top choices for the quarter.

With the race of low-cost retail deposits intensifying, most banks saw a decline in the share of their CASA deposits during the quarter and increased reliance on term and bulk deposits. Banks maintained that while deposit accretion is intensive, overall deposit growth trends are healthy and supportive of the steady growth in credit.

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