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Valuations Look Stretched In Banking Space

The Bank Nifty has given a 24 percent return on a year-to-date (YTD) from January 2017 onwards, significantly outperforming benchmark Nifty’s 14 percent return in the same period.

This has been largely led by expectations of-

  • improved asset quality and anticipation of systemic resolution on large and lumpy NPAs,
  • developments on the macroeconomic front, e.g. passing of GST; and
  • revival in loan growth.

Nifty’s outperformance has led to both PSU and private sector banks being priced higher than the past 7year mean valuation, ICICI Securities said in a report.

Now, with asset quality woes taking a back seat as incremental loan delinquencies continue to trend lower in Q4FY17, there has been a positive surprise on loan growth in both retail and non-retail segments, said the note.

Loan growth had remained silent at 12 percent CAGR for FY13-FY17, with the lowest (5.1% YoY) being in FY17. This was due to:

  • slowdown and uncertainty in the macroeconomic scenario accentuated with high rates,
  • higher asset delinquencies, and
  • credit substitution.

The domestic brokerage firm stated that now with lending rates continuing to decline, retail loan growth is estimated to be higher than systemic loan growth, especially in the mortgage segment.

“With current inflationary expectations coupled with improvement in the macroeconomy, we estimate corporate loans to grow marginally in FY19, taking the systemic loan growth to 14 percent YoY,” it said.

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