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Loan growth increases to 23%; Deposits growth muted; Recent rate hike to accelerate deposit mobilization

Loan growth increased to 23.0% YoY vs 22.7% a fortnight earlier. Loans in absolute terms increased by Rs.365b during the fortnight.

Deposits in absolute terms reduced by Rs.117b; deposit growth declined to 15.0% as compared to 15.8% a fortnight ago.

Incremental CD ratio for YTD continues to remain high at ~100%. With 3Q and 4Q being the busy season, credit growth is expected to remain strong

While the credit up tick remains strong low deposit growth, lack of government spending, and net FII outflows has resulted in tight liquidity in the system.

Unlike the previous cycles, banks have been proactive and have increased the lending rates along with the deposit rates, indicating focus on margins.

We expect margins to decline in 2HFY11 vs those reported in 1HFY11 on account of increases in deposit rates. For FY11 as a whole NIMs would remain high compared to FY10 levels led by benefits of deposits re-pricing, strong CASA base, improving loan growth, and higher CD ratio. Our top picks are ICICI Bank, SBI and Yes Bank, South Indian Bank.