Indian banks may protect earnings while inflation-targeted as credit growth picks up and the pick-up in corporate loans could make up for a moderation in retail – evident from longer-term trends, deposit cost inflation at a lag. and banks make provision for the buffer according to Jefferies.
“With 100 basis points (bps) lower growth impacting profits by 2-9% and 5 bps lower net interest margin (NIM) by 1-5%, PSUs are more vulnerable,” the note said. top stock picksICICI Bank and Bandhan Bank are top buyers, IndusInd Bank (IIB) looks attractive.
Higher inflation and rates have a limited impact on banks’ credit growth, but have different effects on corporate and retail credit growth. The global brokerage said the bank’s corporate credit growth improves in times of high inflation as working capital is needed and bonds become costlier.
“Banks are better margin-managers in rate cycles as they adjust credit/duration spreads etc. to manage the extent of price increases. We also saw this in the recent COVID cycle when spreads/margins were largely stable, despite sharp cuts. The loan-mix, funding-mix and asset quality play are the big givers of the NIM, rather than just interest rates,” Jefferies said.
As India tightly monitors inflation controls and global regulatory action, we see a period of FY 11-14 when high oil prices of $100-125/bbl pushed up India’s CPI by 10-11% . This, along with normalization from the GFC, prompted the RBI to raise policy rates and keep them high till the CPI moderates.
“Our India Strategist estimates that the RBI may raise policy rates by an additional 75-100 bps over the next 6 million years, leading to an overall increase of 150-180 bps (in reverse repo/SDF terms). The additional CRR hike can be used to offset any jump in G-Sec yield for OMOs.”
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