The recent pick-up in loan growth to 17% in August from 15% in July, can be partly attributed to the tightening in money markets and corporates shift away from instruments such as CPs (commercial papers). However, even adjusted for the CP issuances, loan growth is relatively high at 15%. Another potential explanation could be the substitution of foreign currency borrowings with INR debt by corporates, given the sharp depreciation in the currency. However, ECB (external commercial borrowings) data does not corroborate this and even in the month of July, ECB issuance was relatively high at $3.7 bn.
Correlation to IIP & GFCF has broken down: Historically, a key driver for domestic loan demand has been corporate capex, and the corporate segment is the largest component of bank loan books. Therefore, historically loan growth has had strong correlation with the investment cycle and both GFCF (gross fixed capital formation) and IIP (index of industrial production) growth. In the past 12 months though, this correlation appears to have broken down and even as GFCF has dropped to 4% year-on-year and IIP growth has been averaging at -2%, loan growth is still at 15-17%.
The recent RBI publication, which projects investments in large corporate projects to drop to R1.5-1.8 tn from R3.7 tn in FY11. The decline has been across all the sectors.
We still expect corporate loan growth to fall as investments slow further, with project loan approval dropping to R1.9 trn from R3.7 trn in FY11. The fall in new projects pipeline has started to reflect in incremental planned capital expenditure, which declined 20% y-o-y in FY13. The falling capex could weigh on corporate loan growth.
Growth still high in problem segments: In addition to the relatively high growth rates, a growing problem, a large share of incremental growth continues to emanate from high stress segments. Most banks have increased their focus on the consumer segment and growth here has picked up from 14.5% to 17% y-o-y. However, for the overall banking system, the retail contribution is still relatively low at 30% of incremental loans. On a YTD (year-to-date) basis, the infra segment has contributed 45% of incremental loan growth.
There have been increased instances of re-financing of existing facilities as companies with high degree of over-leverage are finding it challenging to service their debt in the current environment. This explains to some extent the sudden increase in growth in the gems & jewelleries segment and continued strong growth from infra and metals despite a sharp slowdown in investment activities.
Growth has remained strong in the infra, metals, gems & jewelleries segments. Housing loan growth has picked up (18% y-o-y), however overall retail loan growth at 17% y-o-y, remains close to system loan growth. On a y-o-y basis, infra and metals have contributed 30% of incremental credit growth, while retail segment has contributed 21%. Continued growth in stress segments would mean that current asset quality issues are unlikely to dissipate quickly. We expect 12-13% to be a realistic credit growth target for FY14e and sharper moderation from corporate segment. We remains cautious on corporate lenders and PSU banks.
The banks are currently trading at 20-60% discount to their historical valuations. However, we believe that current challenges are unlikely to resolve quickly and stock prices may remain volatile in the near term. With loan growth continuing to come from stress segments, asset quality issues are unlikely to abate in a hurry. The stress is being felt by large corporates as well with an increase in demand for re-financing. We remain cautious on corporate lenders such as SBI, PNB, BOI, Union, ICICI and Yes Bank despite valuations having moderated.