Bank credit growth remains moderate but the outlook is improving due to healthy traction in mortgage, auto and cards led by faster economic recovery, Emkay Global Financial Services said on Monday.
Corporate loan growth is still low due to disintermediation by bond markets and cautious stance by banks, though some seasonal pick-up can come around in Q4.
"A mengful recovery in credit growth will be visible from FY22 as the economic recovery strengthens and risk averseness recedes," said Emkay in a research report.
The stress of small and medium enterprises can be largely contained via Emergency Credit Line Guarantee Scheme (ECLGS) and restructuring. Within corporates, SREI Group, Future Retail, Shapoorji Pallonji and MMTC remain stressed.
On the other hand, corporate resolutions too are showing signs of revival with even the worst of the assets (for example Jet Airways and DHFL) registering reasonable interest from investors, thus raising the hope of some salvage value for banks.
Emkay said prudent provisioning can keep banks' earnings growth under check. Amid better-than-expected asset quality experience, incremental contingent provisioning should be limited for banks with otherwise strong provisioning buffer.
Some banks may use the opportunity to shore up the provisioning buffer. "Among large banks, we expect ICICI to report healthy profits followed by Axis as the bulk of the heavy-lifting on provisions is largely done."
Emkay said the recent stock rally reflects the positive outlook on growth and asset quality, and looks sustainable.
The banking sector has seen a decent run-up recently with broader economic indicators showing early signs of a revival after unlocking, leading to better credit outlook and better asset-quality experience than earlier expected with lower incidence of NPA/restructuring, raising hope of possible provision claw back in select banks and thus earnings upgrades.
"In our view, the focus can gradually shift from asset quality to growth (credit/earnings) and banks with strong shock-absorption capacity, coupled with potential to grow, can see continued stock momentum," said Emkay.
( With inputs from ANI )
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