One significant problem for Indian banks right now is the decline in deposits. A decrease in deposits might pose challenges for banks in extending loans. Typically, banks utilise deposits to provide loans to individuals and companies, thereby generating profits.
Let’s delve into what’s happening in the banking sector and how it might affect banking stocks.
What’s Happening?
In the Asia-Pacific 2Q 2024 Banking Update, S&P Global Ratings Director SSEA Nikita Anand suggests that banks’ loan growth may decrease from 16% to 14% in FY25. This is because there isn’t an alignment between deposit and loan growth. Therefore, banks might be compelled to slow down loan growth to remain profitable.
However, S&P Global Ratings also states that Indian banks’ overall financial position will remain strong. While loan growth might decelerate, profitability and asset quality are anticipated to remain good.
Loan Growth Compared to GDP Growth
Nikita Anand further mentions that currently, loan growth stands at 1.5 compared to GDP growth, while deposits are just at par with GDP growth. Hence, it is a concern because if deposit growth doesn’t increase, banks might have to reduce loan growth. Failure to do so might require them to focus on deposit accumulation from other sources, which wouldn’t be positive for banks.
Impact on Banking Stocks
If banks slow down loan growth, it could have a negative impact on banking stocks. This is because banks’ earnings depend significantly on the volume of loans they provide. A decrease in loan growth could lead to a decline in banks’ profits, potentially affecting their stock prices.
What’s in it for Investors?
When discussing loan growth in the Indian banking sector, private banks are ahead of government banks. According to figures, the loan growth rate for private banks is approximately 17-18%, whereas for government banks, it’s between 12 and 14%. Hence, there’s a need for private banks to slow down their loan growth.
However, slowing down loan growth by banks could also lead to a reduction in economic activities. This could also have an impact on banking stocks. Therefore, investors should pay attention to how banks perform.
What’s Next?
According to The Economic Times, Nikita Anand mentions that in FY25, banks will need to reduce the pace of lending in line with the increasing deposits. Failure to do so might force banks to borrow from the market, known as ‘wholesale funding’. This funding is costly and directly affects the bank’s profits. Therefore, it’s crucial for banks to focus on increasing deposit amounts while balancing loan growth to ensure stability.
That’s it for today. We hope you’ve found this article informative. Remember to spread the word among your friends. Until we meet again, stay curious!
*The article is for information purposes only. This is not an investment advice.
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