Why do PSU banks have an edge over their peers in private banks?

The RBI’s recent data on housing loan growth puts public banks at about 15 per cent and private banks at 5 per cent.

There is a combination of factors behind this. They include weaker demand, pricing pressure, or structure of the loan book which is EBLR-linked, and competition where public banks normally offer lower interest rates, driving the differential in loan growth. Of course, it is despite the fact that there lies no asset-quality concerns driving this weakness, and hence, experts prefer to remain positive on the space.

The RBI’s recent data on housing loans shows that the loan growth of 10 per cent, led by 5 per cent volume growth and 5 per cent growth in average ticket size. The share of public and private banks is similar at 50 per cent.

However, it has seen a slowdown compared to prior-period performance for private banks compared to public banks. About 80 per cent of the housing loans are in the Rs 1-10 million ticket size by value, with faster growth in higher ticket-size loans. Top 7 states contribute to 70 per cent of the overall housing loans, with Maharashtra contributing 30 per cent of the overall loans. Overall, there are stable trends on most operating metrics.

Discussions with industry players suggest different things. Private banks have been slow because the two leading banks, HDFC Bank and Axis Bank, have been focused on improving margins over growth. Also, there is a greater preference to grow LAP over housing loan, given the margin differential for the same level of risk. Moreover, in a softening rate environment, especially in the early part of the rate cycle, EBLR-linked loans re-price faster, and hence, the book is less profitable, making it challenging to grow.

The differential between public banks and private banks is reasonably wide, making it relatively easier for public banks to operate. However, this is more cyclical than structural, and hence less worrisome at this stage. Besides, asset quality continues to hold up well. Lenders have generally chosen to cut back on the riskier part of the loan book in recent years as they tightened their credit filters.

Analysts remain less worried about this portfolio on this issue. Collateral prices are still high compared to loan values at an aggregate level, which implies that the ability to liquidate and leverage the excess equity in the collateral would keep credit costs lower in the medium term.

An analysis by Kotak looks at the housing loan market from three broad perspectives to measure affordability. Housing loan interest rates are turning favorable. Income levels are still holding up reasonably well when one looks at the tax collection data. Overall housing prices still look comfortable.

One may probably see lenders getting a bit more comfortable once there is greater visibility of the profitability of these loans and ready to take a bit more risk than before.

EoM.