Loan growth of 6% in first half provides banks with strong base, says Vishal Goyal of UBS Securities

Loan growth of six percent clocked in the first half of this fiscal -- which is otherwise typically weak for credit -- will provide banks with a strong base, said the head of India research and banks at UBS Securities.

In an interview with CNBC TV18, Vishal Goyal spoke about expectations from banks in the second quarter, risks involved, and his views on mortgages and small home finance companies among other things.

Speaking of the banking sector at large, he said, "We are constructive on this sector. It will only become stronger with loan growth coming back in the system. According to the last report, the data point is around 16 per cent year on year. The first half is generally weak and used to see zero growth but we've already seen six per cent growth that gives us a strong base for NII (net interest income) growth."

He also said that looking back on the last 15-16 years and multiple cycles, this kind of environment happens once in three to five years.

Loan growth expectations
Goyal said that average loan growth will still be higher than that seen in March.

On margins, he is slightly more positive than the Street as his estimates are 10 basis points higher.

"There are multiple margin tailwinds, one of them being loan reprising benefit," he said.

Risks for banking sector
"None of the risks will immediately appear," Goyal said.

He added that the biggest risk is the global economic cycle and interest rate tightening: "Its impact could either come in exchange rate volatility or excessive tightening in the local economy."

On mortgages and small home finance companies, he said, "if these companies have the pricing power of increasing interest rate and if they pass that on to both the existing as well as new customers, I think then those businesses wouldn't worry much because there is structural demand for affordable housing."

Goyal added that historically these small companies suffer at the time of rates rising.

Public sector bank prospects"Every time people become bullish on public sector banks, something or the other keeps happening. After almost seven-eight years of cleanup on asset quality, finally their credit costs are lower than some of the private sector banks," Goyal said.

"And there is still room for some public sector banks to report lower credit cost. This is generally the environment when one can buy public sector banks," he added.