Indian banks have been through a tumultuous time in the past decade, facing challenges such as seething government interference and bad loan difficulties. However, according to CLSA, a capital markets and investment group, Indian banks have now emerged in a much stronger position. The firm noted that balance sheets and profits have rebounded significantly, with profits quadrupling over the past 10 years. The return on equity (ROE) for the Indian banking sector is also at its highest since the financial year 2011.
Deposit growth is expected to coincide with an acceleration in loan growth, which has increased from 10 percent to 15 percent on average over the previous two years during FY12-22. CLSA anticipates that private sector banks, which have not performed well in the stock market recently, are poised to deliver better returns due to the positive business outlook. While public sector banks have outperformed private sector banks in the past year and over the last five years, the firm notes that private sector banks have surpassed PSU banks in current account (CA) deposits in the past decade and have reduced non-deposit borrowings.
Net non-performing loans (Net NPL) have decreased to decadal lows, driven by improved asset quality, stronger provision buffers, and an enhanced capital position. Profits after tax (PAT) for the sector have rebounded sharply and have quadrupled over the past decade, with the banking sector’s ROE standing at 15 percent, the highest since FY11. Loan growth in the sector has increased from a decadal average of 10 percent to 15 percent over the past two years, attributed to all sub-segments and potentially some shifts from corporate bond substitution.
Over a long time period, loan growth and deposit growth have been in sync, signaling a positive outlook for the sector. The quality of corporate credit has also improved over the past 5-7 years. The firm’s observations highlight the resilience of Indian banks and their ability to navigate challenges, ultimately positioning them for stronger growth and profitability in the future.
