Cyclical tailwinds to drive further re-rating in PSU banks

“Over the past two years, Indian banks have seen sharp moderation in new NPL (Non-Performing Loan) formation, which, coupled with increased NPL coverage during COVID, has resulted in sharp moderation in credit costs. In recent quarters, this has been followed by sharp improvement in margins, helped by a rising rate cycle – higher rates, coupled with retail funded balance sheets and higher shares of repo-linked loans, have led to up-front margin expansion in the current cycle. Loan books have yet to be fully repriced, which implies that margins might expand further before, then moderate in F24,” the global research firm said in a report.

“We expect loan growth to be sustained and credit costs to remain benign over the next few years. We expect current loan growth to be sustained as capex spending accelerates. The capex cycle should, in turn, foster job creation, accelerate income growth, and drive more growth opportunities even in the retail and SME segment,” it said.

“Against this backdrop, we expect the credit cycle to remain benign and see credit cost undershooting over the next few years,” it said.