Retail deposit growth to drive revenue, re-rating for Indian banks: Sumeet Kariwala of Morgan Stanley

Sumeet Kariwala, Executive Director, India Banks Analyst, Morgan Stanley

Banks that can gain market share in retail deposits without paying up will deliver better revenue growth and re-ratings, said Sumeet Kariwala, executive director, financials equity research at Morgan Stanley.

“Retail deposit rates have gone up in the past six to nine months. The bulk of the increase happened last month when the State Bank of India took up deposit rates by 60-80 basis points. Deposit rates will have to go up further. Over the next few months, banks will gain on margins further. The full impact of the rate hike will reflect in FY24,” Kariwala said in an interview with CNBC-TV18.

According to Kariwala, structurally, whenever interest rates rise, banks benefit on margins. Interest rates are going up because growth is looking better. That also means banks will cut down on risk aversion and grow the unsecured and higher-margin segments faster. Banks will retain a lot of the margin expansion that we’ve seen, he said.

“The Indian banking sector has been seeing significant margin expansion,” he said. “Two years down the line, the margins will be higher than what they were two quarters ago.”

Loan Growth

Speaking about the key aspects that will drive the re-ratings for financials, Kariwala explained that when banks come out of events like a recession or a slowdown, re-rating is based on two legs – asset quality level and revenue growth. He added that revenue growth is a function of two things – loan growth acceleration and margins.

Kariwala also said loan growth will continue to see an upward trend as corporate and financial balance sheets are good.

“Loan growth over the last six months has accelerated from 9 percent to 18 percent. Going forward, we are likely to see the corporate capex cycle pick up,” Kariwala said.

As the supply side is in place and corporate and financial balance sheets are good, Kariwala said even if loan growth slides to 14-15 percent from the current 18 percent, it may reaccelerate to 16-17 percent sooner, going ahead a few quarters.

“Over the last 10 years, India has been moving from one crisis to another. We had a corporate NPL cycle, followed by demonetisation, GST, NBFC crisis, and then Covid 1 and Covid 2. Indian banks, through these cycles, have provided aggressively, particularly in recent years,” he said.
Balance sheets – whether government, private sector or financial sector – have been “so good,” he said.

Kariwala’s stance on the Indian banking sector hasn’t changed much since he shared his views in June this year.

“We remain constructive on Indian banks, with a preference for large banks. This is given the significant improvement in balance sheet strength despite the first Covid-19 wave. Both capital and coverage on impaired loans have improved significantly during the crisis,” he had said.

In a Moneycontrol exclusive in September, Kariwala stressed that corporate loan underwriting, NPL recognition and recovery process have significantly improved in India over the past five years and will be positive over the medium term.

He added that corporate balance sheets have improved. As the economy stabilises, there will be a continued pick-up in working capital demand and that will also lead to higher corporate capex over the medium term.