Markets
Banks set for another robust quarter
Summary
Sustained credit demand seen last quarter and lower credit costs would be the key drivers of growth for banks. The systemic credit growth stood at 15% y-o-y as of 24 March, showed the latest fortnightly data by the Reserve Bank of India (RBI).
After reporting stellar results in the December quarter (Q3FY23), banks are likely to see healthy earnings performance in Q4 as well. Recently-released provisional business updates by some large banks are a precursor to that. HDFC Bank and IndusInd Bank said they clocked year-on-year (y-o-y) loan growth of about 17% and 21%, respectively.
As such, sustained credit demand seen last quarter and lower credit costs would be the key drivers of growth for banks. The systemic credit growth stood at 15% y-o-y as of 24 March, showed the latest fortnightly data by the Reserve Bank of India (RBI). The systemic credit growth has moderated from the levels seen in recent past. Even so, banks are expected to sail through March quarter with decent performance as far as the credit growth is concerned. Kotak Institutional Equities expects banks under its coverage to report solid net interest income growth of around 25% y-o-y on the back of around 16% y-o-y loan growth.
Another positive in Q4 is likely to be in the form of stable net interest margins (NIMs) aided by faster repricing of loans. Motilal Oswal Financial Services estimates NIMs of private sector banks to remain stable sequentially and improve slightly for public banks.
So far, so good. But, in FY24, NIMs are poised to compress. Banks are said to have been using the excess liquidity in the system to fund credit demand. However, with internal liquidity almost used up, the competition for deposits gets intense. To garner more deposits, banks would have to raise deposit rates. In effect, NIMs would come under pressure. Against this backdrop, analysts reckon NIMs have likely peaked in Q4. “Margins are expected to remain largely flattish on a sequential basis for most banks. However, margin contraction will be visible FY24 onwards," said Dnyanada Vaidya, research analyst, Axis Securities.
Further, concerns could also emerge on the sector’s funding gap. “Banks are benefiting from improved credit growth, but the funding gap is rising as deposit growth at sub-10% lags credit. While banks have some leeway in terms of higher liquidity and excess SLR—for sustainable growth without diluting funding mix—deposit growth uptick is key, in our view," said a report by Elara Securities (India). The quality of deposits will also need to be monitored here with the mix shifting to wholesale deposits from retail deposits, as the latter is stickier in nature.
True, RBI’s latest decision to keep the repo rate unchanged surprised the Street. While a status quo is a breather, the impact of the cumulative 250 basis points hikes since May on the cost of borrowing for banks will occur eventually. The transmission of interest rates movement into economic activities happens with a lag. “Since assets get repriced faster than liabilities, even with a pause in rate hike, repricing of liabilities would continue," said Kaitav Shah, BFSI research analyst, Anand Rathi Institutional Equities.
Moreover, as rate hikes start to transmit, the systemic credit growth can taper. “We will watch out for any change in the demand environment, given the challenging macro situation, elevated inflation, and a high base effect," said Motilal Oswal analysts. The broking firm expects systemic loan growth of 13.3% in FY24.
Amid this, a silver lining is that asset quality is in a better state, thanks to lower slippages, and is expected to remain healthy in Q4. But that alone would not be enough to rekindle investor confidence or derive a significant re-rating, in the current scenario. So far in 2023, the Nifty Bank index has declined 5%. The Nifty Private Bank index has seen a similar fall, but the Nifty PSU Bank index has seen a bigger drop of 13%.
