Jyotivardhan Jaipuria, who is MD & head of India research, Bank of America-Merrill Lynch said that he thinks the banking sector will be an outperformer this year. As the sector is dependent on the economy, it will gain from higher growth. The 3 main factors affecting this sector are credit expansion, lower non-performing loans and lucrative valuations.
Though credit expansion was low over the last 6 months, it is already showing symptoms of speeding up. The incremental loan-deposit ratio is nearly 100%. It is caused by speeding up of home loans, car and infrastructure-associated loans.
The credit expansion in FY11 is anticipated to be 20% as against 15% in FY10. There is likely to be an upside to the growth calculations, as the economy is in upswing.
Due to this, the number of bad loans too will be less than anticipated. The intensity of bad loans has already reached its height and now it is anticipated to fall as cash flows for corporates get better.
The improvement in loan deposit ratios will benefit bank margins as banks divert assets from low-yielding bonds to loans. Another reason for better margins is the anticipated increase in loan and deposit rates, due to asset-liability disparity that banks reflect on their books.
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