According to a report, India's banking sector is poised on the threshold of sharp growth with rising RoE (Return on Equity), robust asset quality, and significant infrastructure financing opportunities in the decade ahead.
According to the report of smallcase manager Omniscience Capital, "The housing finance market in India has recorded growth of about 25% per annum from FY22 to FY24 and is estimated to have a growth rate of 15-20% compound annual growth rate (CAGR) up to 2030. Indian banks will be playing a vital role while funding India's humongous plans for an overhaul of infrastructure under NIP and Gati (NS:ALLA) Shakti initiative."
The current P/E levels of Indian Banks are profoundly undervalued relative to the expected credit and RoE growth, the report said, adding that the robust credit growth is on account of increasing GDP growth and consumption in India alongside significant asset-quality improvements and reduced NPAs.
The sector is likely to be re-rated at these current valuation levels prevalent in the market. Incremental efficiency gains in SCBs through higher digitization can bring about further margin improvement through reduced OPEX, thus improving the potential return from this sector as well. For example, a scenario analysis has been conducted for the next five years from CY2023 to CY2028 on expected credit growth.
The report further said that in the last financial year India saw a high credit growth. Gross bank credit of the country had grown by 16.3 per cent in FY2024-a decade high YoY growth. Rising household incomes, increasing manufacturing and export activity, improved capacity utilisations across industries and rising aspirations and consumption of a growing middle class were driving this expansion.
On the creditor's (bank) side, both GNPA and NNPA of Indian Banks have declined sharply. While reaching a decadal low at INR 5.7 lakh crore and INR 1.3 lakh crore during FY 2023 with GNPA Ratio and NNPA Ratio of 3.9 per cent and 0.95 per cent respectively. The report adds that this gain has been on account of improved borrower selection by the lenders, raised policy interventions such as the Insolvency & Bankruptcy Code, and a significant write-off of bad loans.
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