Post Covid, banks look set for the roaring twenties | Economic Times

Fortunes of Indian banks have swung — first from the doomed to an unmitigated disaster, and then to the golden age of growth — in exactly a year as the faster-than-expected economic recovery, high provisions and strong capital positions have adequately prepared the lenders for an expanding credit cycle that should last the next few years.Private lenders should gain disproportionately as they are better placed to take advantage of the recovery as the economic pendulum swings to the other extreme following an unprecedented contraction in Q1FY21. Motilal Oswal Securities forecasts that private banks will increase their market share to 45% by fiscal 2025 and will dominate the market with a 54% share in total credit by fiscal 2030, up from 40% now.“The banking sector is entering a golden period, with the focus shifting from asset quality issues toward strong growth opportunities, market share gains, and earnings pendulum swings to decade high returns on equity (RoE),” the Motilal Oswal note said.The benchmark Bankex Index had fallen to a 52-week low of 18,430.26 points on Mar 24, 2020, as an RBI moratorium, economic uncertainties and expectations of higher NPAs dented confidence. Since then, the index recorded all-time highs, ending at 38,462 on Tuesday.Estimates about a deterioration in asset quality have also not come true.For example, in May 2020 Crisil said banking sector NPAs are expected to rise from 9.6% of total estimated advances in March 2020 to 11-11.5% by March 2021. The rating agency now expects bank gross NPAs to be at 8% at the end of the current fiscal.Motilal said it had upgraded its earnings estimates for the banks under its coverage by 23% in fiscal 2021 from the lows of March 2020. “Aggregate return on equity (RoE) for private banks in our coverage is likely to improve to a decade high of 16.3% by FY23 (v/s 10-11% over FY18-20).Among PSUs, we estimate SBI's RoE to touch about 15% by FY23,” it said.Large banks like ICICI and SBI which also have big financial subsidiaries contributing to their profits are likely to do better, the firm said.