Banks Q2: keep one eye on loans, another on deposits

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Photo: Mint


  • Amid revival in credit growth and rising interest rates, banks’ Q2 results would be in focus
  • Big private banks may grow at a higher rate compared to mid-cap/small-cap peers, PSBs

Private sector lender HDFC Bank Ltd will announce its September quarter results on 15 October. In the Q2 update released last week, the bank said its year-on-year (y-o-y) loan and deposit growth in the last quarter was 23.5% and 19%, respectively. This is better than the system growth and would aid HDFC Bank’s earnings, even as investors watch out for commentary on its merger with HDFC Ltd.

Provisional data for the quarter published by other banks largely indicate that Q2 has been decent. Revival in the industry’s credit growth and rising interest rates would offer a fillip to net interest margins (NIMs). Continued momentum in retail loans and higher demand for corporate loans are seen as drivers for the sector’s loan growth trajectory. As on 23 September, overall bank credit growth was at 16.4% y-o-y, showed data by the Reserve Bank of India (RBI).

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Wide gap

In Q2, large private banks are expected to grow at a higher rate vis-à-vis mid-cap and small-cap peers and public sector banks (PSBs), said analysts at Nirmal Bang Institutional Equities. “Large private banks are expected to report acceleration in growth (21.4% y-o-y loan growth) while mid-cap and small-cap private banks too are likely to maintain the growth momentum at 15-16% y-o-y," it said in a report dated 9 October. Given the favourable base, PSBs are expected to report 20% y-o-y growth in loans, it said.

Since May, RBI has taken a cumulative repo rate hike of 190 basis points (bps). One basis point is 0.01%. With the pickup in credit growth, margins will expand because as interest rates rise, floating loans get re-priced. So, banks with a higher mix of floating-rate loan books stand to benefit.

Analysts at Prabhudas Lilladher expect NIMs of banks under their coverage to rise by 9bps sequentially to 3.74%. The brokerage said NIM expansion for private banks may be higher by 11bps compared to 5bps for PSU banks as the proportion of repo-linked loans is higher for private lenders.

The transmission of repo rate hikes has to be done for both loans and deposits. So far, lending rates have risen at a faster pace than deposit rates, giving banks a higher spread. It will help banks’ NIMs in Q2. However, with declining systemic liquidity and robust credit growth, garnering deposits will be important to fund the loan growth. So, to woo customers, deposit rates will have to be raised. “As we enter a seasonally strong 2H along with a steady demand environment, we could see the race for deposits getting hotter which in turn should result in upward revision in deposit rates," said analysts at JM Financial Institutional Securities. This means an increase in the cost of deposits could exert some pressure on medium-term NIMs. So, management commentaries on this will be keenly watched when Q2 results are out.

Asset quality, another crucial metric for the banking industry, is improving. According to Kotak Institutional Equities, asset quality should see further improvement with strong near-term commentary on the direction of non-performing loan ratios for FY23. For banks under its coverage, the brokerage expects net interest income (NII) growth to bounce back to 17% y-o-y on the back of 15% y-o-y loan growth.

That said, slippages from restructured and Emergency Credit Line Guarantee Scheme book will be among key monitorables in Q2FY23. Also, given the recent movements in bond yields, the impact on banks’ treasury income needs to be tracked, too. All said, investors in banking stocks are bracing for strong Q2 earnings. This optimism is well captured in the Bank Nifty, which gained 7.5% so far in FY23, while the Nifty 50 index is down 1%.

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