The economic slowdown is expected to weigh on the banking system's credit offtake, but the brokerage firm BNP Paribas says the sector should rebound in India due to lower fund rates, production efficiencies and lower taxes.
The brokerage said improved operating productivity generated by online technologies and lower labour costs would ensure that the cost-to-income ratio will continue its downward trajectory.
"We believe that lower funding costs, cost efficiencies and the benefit of lower tax rates should result in a 370bps increase in equity (RoE) for private banks. Higher ROEs should warrant much higher price-to-book ratios (P / Bs). We see a 10-15% increase over the next five years from current valuations of private banks, "BNP Paribas said.
Because the asset quality process has ended, funding costs should be smaller than those in the previous cycle, the brokerage added. BNP Paribas will see public sector banks (PSBs) back in the green over the next five years, but their ROEs will be in mid-single digits.
BNP Paribas said HDFC Bank still has the ability over the next five years to produce the highest investor return–a CAGR of more than 20%. Through unlocking shareholder value in its affiliates, Kotak Mahindra Bank can also generate good returns.
The firm claims that the next major market is life insurance.
"We believe life insurance is likely to be witnessing its' Jandhan' moment soon when Indian consumers begin to see insurance as essential rather than optional. As awareness spreads and the insurable pool increases, insurance is likely to be more affordable," said the brokerage.
At multi-quarter lows, auto sales, cement demand, IIP, rural wage growth, unemployment numbers, export output, etc.
BNP Paribas Securities said that only four of the 35 macro metrics have shown a favourable trend over the past three months.
While expectations may be a mild recovery in Q3FY20 due to the festival season, there is a high likelihood that macro indicators will turn negative afterwards.
The brokerage said the concern is not inherently demand-related, it is also likely on the supply side, such as suppliers taking time to adjust to evolving consumer preferences (such as better quality vehicles and ready to inhabit houses), banks ' unwillingness to lend and restrictions that need to alleviate feelings for a CAPEX process revival.
BNP Paribas said that there are many cushions to help the Indian economy escape a hard landing.
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