Shrinking margins to keep private banks on the leash in Q4

Asset quality needs continued monitoring to avoid repeating past mistakes that led to a rise in non-performing assets. (Image: Pixabay)
Asset quality needs continued monitoring to avoid repeating past mistakes that led to a rise in non-performing assets. (Image: Pixabay)

Summary

  • While some banks are projected to gain from relaxation in RBI guidelines related to AIF exposure, the impact on aggregate performance is limited

Banks are expected to record moderate growth in profits in the March quarter (Q4FY24) despite strong credit offtake. Blame the scramble for deposits that is putting pressure on net interest margins, especially for private banks.

Deposit growth remains 3-4 percentage points lower than credit growth. Further, asset quality needs continued monitoring to avoid repeating past mistakes that led to a rise in non-performing assets (NPAs).

Also Read: Mint Explainer: Behind the worst bank deposit crunch in nearly 20 years

Bank credit has grown over 16% year-on-year on an aggregate basis for the fortnight ended 22 March, adjusted for the HDFC merger impact, according to the latest RBI data. 

Notably, FY24 would be the second successive year of 15%+ credit growth, an impressive pickup from a low of 9% in FY22. Growth rate would have been better but for the moderation seen in unsecured lending segment because of the tightening of norms by RBI in November. 

The demand from the industrial segment, the driver of past credit demand (and also, the prime cause of banking sector NPAs), remained subdued. However, retail and services segments have more than made up for it with double-digit growth rate. Going forward, industrial credit growth should also see more traction with improving manufacturing capacity utilization and strong corporate balance sheets. 

Despite witnessing some improvement, deposit growth is still significantly lower at 12.7%, as per a research report by Nirmal Bang Institutional Equities. Deposit mobilization has become more onerous with the stock market boom and mutual funds cornering an increasing share of retail savings. 

This is also borne out by the fact that fixed deposits, which have higher cost for banks, have grown at a faster rate of 15.2% against CASA growth of only 7.5%. 

Private banks are under greater pressure to take recourse to FDs since they have a limited buffer of deposits. A report by BNP Paribas projects NIM to erode by 70 bps year-on-year for Kotak Mahindra Bank in Q4FY24, 60 bps for ICICI Bank and 30 bps for Axis Bank. 

The mixed picture of high credit but insufficient deposits had restricted the growth in earnings. Motilal Oswal Financial Services projects earnings to grow by only 9% year-on-year (excluding HDFC Bank), much lower than the credit growth. 

For private banks, this is projected at only 6% against 12% for public sector banks or PSBs. While some of the banks are projected to gain from relaxation in RBI guidelines related to AIF (alternate investment funds) exposure, the impact on aggregate performance is limited.

The revised RBI guidelines have relaxed provisioning requirement for investment done by banks in AIF which are linked to their debtor companies. 

PSBs are benefiting from reduced slippages and improved recoveries, with their gross NPAs declining more rapidly than RBI’s baseline projections from June and December.

It may be noted that PSBs had been the worst performers in terms of NPAs which had reached as high as 12% a few years ago against less than 5% for private and foreign banks. 

In terms of individual banks, IDBI Capital projects an 18% profit growth for IndusInd Bank and 6.5% for ICICI Bank. Meanwhile, the net profit of State Bank of India is expected to drop year-on-year. On the other hand, for Punjab National Bank, Motilal Oswal projects a sharp 146% increase in earnings, while Nirmal Bang estimates an 80% growth. 

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