The Indian financial sector will see a ‘trend reversal' on interest rates and a rise in bank credit growth this year.
That's the word from broking and research firm CLSA which has identified some key trends for the sector for 2018. Besides interest rates and credit growth, it expects “continuity in financialisation of savings, $15-20bn of pipeline for capital raisings and pick-up of momentum in housing. Election politics, regulations and wage negotiations are key wild cards,” CLSA said in a report.
The financial sector ended 2017 on a strong note, with the Nifty Bank index rising 41 percent returns as compared to a 29 percent increase in the benchmark Nifty 50.
Here are the five key trends CLSA has identified for the sector:
Trend Reversal: Interest Rates And Credit Growth
Both interest rates and bank credit are likely to pick up due to tighter liquidity, risks of a breach in the fiscal deficit target and higher inflation. CLSA expects a 25-50 basis point rate hike in banks' deposit and lending rates, while bank credit may improve to 11-13 percent over the next two years from 4 percent in the last financial year. This will be led by an improving economic activity and increase in demand due to rising commodity prices.
Financialisation Of Savings, Capital Raising And Housing
Indians would continue to shift to towards more financial savings but competitive pressure on pricing can drag the net interest margins of banks.
Indian capital markets saw inflows of over nearly $8 billion through initial public offerings last year, and CLSA expects this trend to continue with $15-20 billion of capital infusion through this route.
The brokerage also expect affordable housing space to grow at an annualised rate of 16-17 percent until March 2022.
NPA Resolution, Transition to IndAS, Bank Recapitalisation
Resolution of banks' non-performing assets under the Insolvency and Bankruptcy Code, transition to a new accounting standard and recapitalisation of public sector lenders will remain the key milestones for this year.
Of the 40 large stressed accounts identified by the Reserve Bank of India, 12 are expected to be resolved by the first quarter of financial year 2019, CLSA said, while remaining cases are likely to be resolved by the third quarter. The government's move to capitalise public sector banks should increase credit growth and provisions towards stressed loans, the research firm added.
CLSA believes the transition to IndAS would cost public sector banks $25-30 billion.
Election Politics, Regulations And Wage Negotiations For PSU Banks
Election led-politics, new regulations and outcome of wage negotiations for public sector banks (which happens in every five years and began from November 2017) will remain the key wild card for the banking sector. There are eight state-run elections lined up for this year, with central elections next year which could bring in volatility. Higher rural spending in view of vote-bank politics would burden fiscal budget at the time when tax collections are decreasing.
New To Market- Non-Lending Financials
CLSA expects a pipeline of about $30 billion new non-lending financial listings over the next 12-18 months. These companies, which include insurance firms, mutual funds and exchanges will benefit from the financialisation of savings and low penetration levels, the financial major said in its report.
Based on these trends, CLSA has identified four key investment themes and a specific stock under each:
Top Picks
Corporate Bank With Strong CASA And Balance Sheet: ICICI Bank
- Asset-quality pressures to abate over the next year.
- The lender is derisking assets by growing its loans to higher-rated corporates and in the retail segment.
- With a strong CASA franchise and well-capitalised balance sheet, it is poised for growth and ready to absorb credit costs and IndAS transition.
- Valuations at 20-30 percent discount to peers.
- Among top picks with a price target of Rs 380.
Small Banks Becoming Large: IndusInd Bank
- Better CASA ratio and expansion into new retail segments will drive growth.
- Acquiring franchises could be key to future profitability.
- Forecast a 25 percent earnings CAGR over FY17-20 with 18-19 percent ROE.
- Top buy with a target price of Rs 2,060.
Housing Finance: HDFC
- Best play on the opportunity in the housing finance segment.
- Should see 16-17 percent compounded annual growth rate in loans over FY17-22.
- Gains from sale of stake in subsidiaries can be utilised to beef up contingent provisions.
- Favourable risk-reward.
- Retain buy rating with target price of Rs 1,900.
Non-Lending Financials: ICICI Prudential Life Insurance
- Top pick in this space.
- Should benefit from healthy growth in premiums and expansion in margins.
- Valuations are reasonable.
- Rate the stock as a buy with a target price of Rs 560.
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