Milind Agrawal, Fund Manager, SBI Mutual Fund, gives his outlook on the banking and finance sector for 2022
How do you see 2022 for banking and NBFCs in terms of loan growth, NPA stress and profitability? Which pockets look promising? Which appear vulnerable?
Growth: We continue to see a steady improvement in credit demand, led by retail and SMEs, while corporate credit offtake is still weak. As demand momentum sustains and capacity utilisation at the system level improves, we strongly believe that demand from corporates for credit will come back.
While this narrative has been there in the marketplace for the last several years, today bank balance sheets are in a much stronger shape, with adequate cover on bad assets as well as ample capital and liquidity to grow. Here, we must remind ourselves that PSU banks still command a dominant market share at the system level in both deposits and loans, and hence their being in good shape is important from the sustainability of the growth point of view. As regards NBFCs, disbursements have picked up close to pre-COVID levels in most segments, with housing near all-time highs. NBFCs run by strong management teams, and those that have created a niche for themselves, whether in vehicle finance, gold finance, housing or microfinance, are expected to see strong growth.
Asset quality: We are quite sanguine on asset quality across the lending spectrum, with corporate credit expected to be the best-performing segment across lenders. Within retail, while there are specific pockets of stress, like microfinance institutions, that could take longer to recover, the larger categories of housing, personal loans, and to an extent, vehicle-finance loans are showing continued strong performance. Banks, both public and private, are carrying provisions on bad assets to the tune of 70 per cent, along with reasonable contingency buffers held by private banks. These, we believe, should provide a cushion to the earnings, even in case we were to see a moderate pick-up in bad assets over the coming few quarters. There is still a large pool of assets that are written off by banks at the system level and we expect recoveries to trickle in, led by resolutions.
Some of the recent regulatory changes by the RBI are expected to increase NPA ratios for NBFCs optically, but we believe the larger, established players are already carrying sufficient buffers and hence we see minimal impact of these on profitability.
Profitability: While FY22 itself is strong on profitability metrics for the sector, we expect sector profitability to improve further in FY23 and beyond. This would be led by improving credit growth and lower provisions, while there is expected to be continued investment in ramping up digital capabilities.
Promising pockets: We believe large private-sector banks with a diversified asset profile are very well positioned, with management stability, strong liabilities franchise, moderate stress and adequate capital buffers, and hence we expect them to continue gaining market share.
Vulnerable pockets: Microfinance is one area where we have seen an elevated level of stress and management attrition at the top for quite a few companies, although we do believe that the sector offers decent through-the-cycle profitability.
This interview was conducted in December 2021.
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