A Key Trigger For Banking Stocks May Be At Risk, Says Systematix's Dhananjay Sinha

A declining credit demand is likely to drag the profitability of Indian banks going forward, said Systematix Group's Dhananjay Sinha.

The profitability of banking companies, which surprised positively, may last a quarter or so before being weighed down by a declining demand for credit as companies scale down operations as profits are on a downward trajectory, Sinha, who is the director and head of research for strategy and economics, told BQ Prime.

The better-than-expected credit growth that banks are currently seeing is because of the worsening operating metrics of the companies, Sinha said. Rising interest rates are offering better Current Account Savings Account, or CASA, he said.

However, going forward, this dichotomy is unlikely to sustain itself, Sinha said. If the operating profits continue to decline and the profits contract, then sales growth will also decline for the non-finance and manufacturing sector companies, which will drag credit demand, he said.

Sinha expects credit growth to slow by the fourth quarter of this fiscal year, while funding costs will rise concurrently.

This is because, with the operating profits of companies contracting, the benefit to CASA will come off, Sinha said. This, in turn, will drive the cost of funds, thus forcing banks to increase term deposits or shift the deposit mix toward term deposits.

That can translate to higher interest costs, he said.

"In banking, the rise in profit might be episodic." The investment firm is 'underweight' on banking flagging it as an underperformer in recent times.