Financial Firms To Face Credit Cost Headwind In First Half Of 2025, Says CLSA
The brokerage likes ICICI Bank and Bajaj Finance as stable compounders and IIB as a high-beta player.
Finance companies' performance in the first half of 2025 is expected to be impacted by high credit costs due to unsecured credit. But it is seen normalising in the second half on underwriting tightening by the system over the past year, according to a report by CLSA.
"We like ICICI Bank and Bajaj Finance as stable compounders and IIB as a high-beta player," the brokerage said. Any stock with a beta higher than 1.0, are supposed to be riskier but provide higher return potential.
The pain in microfinance will be severe, but not as long as other crises like demonetisation/Covid, CLSA said, while noting that it does not foresee any large contagion effect from unsecured loans to other products.
Meanwhile, a probable repo rate cut by RBI in Feb or April would temporarily compress NIM, but this would be followed by lagged deposit repricing, it said.
According to CLSA, credit growth is expected to marginally pickup from an estimated 10-11% in fiscal 2025 to 12-13% in FY26. Moreover, in credit cards and personal loans, there has been underwriting tightening for the past year and in retail loans, the sub-Rs 5,00,000 household income segment has witnessed the sharpest growth cut, as this segment is most vulnerable.
"Using RBI data and assumptions, we calculate the retail loan exposure of overdue unsecured loan customers to be Rs 2 lakh crore, that is, 4% of industry retail loans," the brokerage said.
While PSU Banks have narrowed the gap on loan growth in FY24/25, it should reverse in FY26 due to deposit sluggishness at their end, CLSA said. Over the past quarter, banking credit growth moderated from 13% to 11%, in some cases. It is driven by curtailment of supply (unsecured loans, lending to NBFCs) and in some cases due to demand (auto loans).
"Among regulatory matters, proposed LCR and project funding guidelines and the ECL framework are key things to look out for," it said.
While a shallow rate cut cycle is good for banks, pricing power may come back in 2025. In a steady repo rate scenario, banks' NIMs have bottomed out, CLSA said. Savings account deposit rate cuts by Kotak and IndusInd Bank would somewhat aid NIMs, according to the brokerage.
"Additionally, the recent 50 bps CRR cut by RBI would improve sectoral NIM by 3-4 bps," it said. "This should partly offset the impact of the proposed LCR guidelines."
CLSA pointed out that over the past two years, the banking sector has witnessed stiff loan pricing competition as PSU Banks were sitting on excess liquidity. "Loan rates for key segments are lower than pre-Covid levels, despite benchmark rates being higher," it said. "As PSU Banks' excess liquidity has come down meaningfully and at par with private sector banks, we expect pricing power to be back for the banking sector in 2025."
