sankai
Conrad Saldanha, CFA
India celebrated the diamond anniversary of its independence; could this be the year to seek out a “diamond in the rough” there?
With India marking the 75th anniversary of its independence–typically commemorated with a diamond—on August 15, 2022, we thought it would be apt to look more closely at the Indian market, where investors might find a “diamond in the rough” opportunity amongst a tougher global backdrop. With the International Monetary Fund’s recent update bringing down its 2022 global real GDP estimate to 3.2%, including a 3.3% estimate for China, Indian real GDP growth estimate stands out with a 7.4% figure for 2022, and 5.3% for next year.
When digging below top-level figures, certain subsectors—like private sector banking—has enjoyed growth above headline numbers. Specifically, private sector bank (PVB) market share in total credit had grown to 36.5% as of the end of fiscal 2021 (March 2021) from 35.4% a year earlier and 24.8% five years before that.1 We saw more recent (March 2022) data of PVB year-over-year credit growth of 15.0% compared to 9.1% for public sector banks (PSB). The deposit side of the ledger was similar, where PVBs enjoyed a 13.3% year-over-year growth compared to 8.1% for PSBs.2 In our view, these trends of both higher growth levels and market share gains are examples of emerging-markets-specific secular growth. We believe this compares favorably to developed markets, where we find that large incumbents tend to maintain market share.
These Indian PVBs also appear to have a regulatory advantage, as we believe the government is less supportive of non-banking financial companies (NBFCs), a few of which became problem lenders during the last growth cycle. That was part of the overall poor corporate credit quality cycle that these banks had to overcome, but then they also had to deal with demonetization as well as COVID shutdowns. Now, with the Indian economy reopening, it’s an opportune time for banks to seek sustained credit growth potential, which, should they remain disciplined in their risk management processes to limit future non-performing loans, could lead to attractive opportunities going forward as well. Select PVB investment opportunities might be a gift that could keep giving in the years ahead.
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