We expect business conditions for Indian banks to get tougher given decelerating credit demand, falling margins and worsening asset quality (NPAs to rise 3x over FY09-11). Among banks, we prefer ICICI Bank, Axis, PNB, BoB and UBI for their cautious asset growth, ample NPA coverage and sizeable CASA base.
After deflation through most of FY10, our economist expects price instability, leading to lower private investment and durables consumption. Given this, we expect credit growth to decelerate to 15.1% in FY10, and slip sharply to 7.6% in FY11 – resulting in an 11.5% CAGR in bank credit over FY09-11.
Aggressive monetary easing would make credit cheaper. Banks, however, would not have much flexibility to lower deposit rates as small savers would have other attractive investment avenues open to them. Though margins would come under pressure, we expect CRR cuts to soften the impact.
We expect NPAs to increase three-fold over FY09-11, yet they would be at manageable levels of around 4.5% vs around 20% during the previous peak NPAs in the 1990s. Banks today are also better capitalized and credit growth is broad-based.