Markets
Banks to enter a phase of moderation in credit growth
Summary
In keeping with the trend seen in the past few quarters, the credit growth was broad based across segments including retail and corporate segments, though it was mostly led by retail.Banks have closed FY23 on a good note with strong results for the three months ended 31 March (Q4FY23). Last quarter, credit growth remained healthy. In keeping with the trend seen in the past few quarters, the credit growth was broad based across segments including retail and corporate segments, though it was mostly led by retail. For banks under Kotak Institutional Equities’ coverage, aggregate credit growth stayed healthy at about 17% year-on-year (y-o-y) in Q4, slightly lower than about 18% y-o-y at the end of the previous quarter.
Further, continued repricing of loans have aided the expansion in net interest margins (NIM) of some banks. “NIM expansion was not uniform with a few banks reporting declines due to a sharp increase in cost of funds, but these NIM are still closer to their all-time highs," said Kotak analysts in a 5 June report. The brokerage said banks under its coverage delivered healthy earnings growth (22% y-o-y, lower due to loss reported by Axis Bank), aided by operating profit growth.
Also, banks saw a consistent improvement in asset quality metrics last quarter led by lower slippages and better recoveries. While stable asset quality metrics is comforting, sector should brace for near-term headwinds.
For one, investors in banking stocks should keep a tab on the implementation of the anticipated norms on expected credit loss (ECL) from the Reserve Bank of India. If implemented, it could put pressure on the banks’ profitability, although there is no clarity on this as of now.
Note that while banks increased the pace of deposit mobilization in Q4, it continues to lag credit growth as the repricing of deposit rates was relatively slow. Management commentaries suggest the deposit growth momentum should continue going in FY24 as well, since a larger portion of deposit book for most banks is yet to be repriced. This could exert pressure on the NIMs of banks in FY24. “While there could be NIM compression in the coming quarters, for the full year of FY24, we are expecting NIM to be largely flat or marginally lower than FY23," said Dnyanada Vaidya, research analyst, BFSI, Axis Securities.
In this backdrop, the quantum of margin compression remains to be seen. Also, how well banks protect their margins is a key monitorable. While some part of the loans would get repriced soon, the rise in the cost of funds would be sharper with the deposits repricing.
“A few banks with lower loan to deposit ratio (e.g. SBI) or higher share of MCLR (Indian Bank) to be repriced should be able to protect their margins or witness relatively lesser correction. Also, banks with a higher fixed-rate asset book, coupled with a reasonable CASA base, should see margin expansion, once rate cycle reverses," Emkay Global Financial Services analysts said.
Margin pressure apart, in coming quarters, credit growth for banks is seen moderating from the high base of last year. According to Mona Khetan, VP, institutional equity research Dolat Capital Market, “We could see some moderation in credit growth due to both base effect and slower corporate growth, which was led by higher working capital utilisation in last few quarters. Though some green shoots in capex should work in favour of corporate growth."
As such, Nifty Bank index is flirting with 52-week highs. To be sure, the returns of banking stocks are showing diverse trends. Still, large upsides are broadly capped hereon. While Nifty Private Bank index is up 3% in 2023, Nifty PSU Bank index is down 5%. For PSU banks, lack of clarity on ECL norms is a concern and is likely to act as a near-term overhang.
