With rate hike cycle behind, banks’ margins expected to stabilise, credit growth could moderate
3 min read 05 Jun 2023, 03:06 PM ISTLoan growth is expected to moderate to 10-14% in FY24, with margins stabilizing in the near term. The rate hike cycle is largely behind, but managing liability costs is vital to protect margins.
PremiumIndian banks have delivered strong performance during the financial year 2022-2023, with a few banks clocking their decadal-best Return on Assets (RoA), largely driven by robust loan growth, improving asset quality in a post-Covid era and margin delivery as the lenders benefitted from the transmission of repo hike. The Reserve Bank of India increased repo rates by 250 bps in FY23, which the banks took to their advantage as the lag of asset-liability re-pricing.
With the expectation that the rate hike cycle is largely behind us, analysts believe that credit growth of banks to moderate and margins to stabilize going ahead as funding costs reprice.
In FY23, loan growth of banks stood around 15-16%, which is now expected to moderate to 10-14% in FY24 amid muted credit growth in the corporate sector and deposit growth remaining anchored at around 10%.
“Margins for the banking sector are expected to stabilize with an uptick in the near term. The yields will come down, but other incomes for the banks are likely to grow. The slowdown in credit growth is visible and may further decline to 10-12% after the December quarter," said Vinod Nair, Head of Research, Geojit Financial Services.
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The sector’s loan growth was driven by strong traction in retail loans, growing over 20% and NBFCs growing 30% YoY. Corporate growth pace slowed to 6% in FY23 as demand stays selective amidst uncertain macros.
Moreover, deposit growth was around 10% YoY which is likely to limit loan growth as credit-deposit ratio across most banks is near peak levels.
“The on-balance sheet liquidity has been largely consumed, while higher deposit growth coupled with the lagging repricing should catch up, leading to margin softness in FY24 for most banks," Emkay Global Financial Services said in a report.
The brokerage house believes that the rate hike cycle is largely behind and hence managing the liability cost becomes vital for protecting margins. A few banks with lower loan-to-deposit ratio (LDR) or higher share of MCLR to be repriced should be able to protect their margins or witness relatively lesser correction.
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Ambit Capital expects net interest margins (NIM) to compress in FY24 as cost of funds gets repriced while levers for asset repricing are limited.
“Asset quality stays solid with low net slippage. Banks have high coverage on NPLs/stress loans and thus credit costs will undershoot long-term average in FY24. This will partially compensate for loan growth/margin pressures, leading to banks delivering earnings growth of 13% in FY24 vs 48% in FY23," Ambit Capital said.
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Among the three components of the loan book, the brokerage house expects repo and other external benchmark linked loans got repriced in line with repo hikes and will behave as fixed book in case of no repo hikes going ahead. These loans formed 42% of public sector banks’ and and 47% of private banks’ loans.
MCLR, that formed 44% and 17% of PSB and PVB loans, got repriced in line with rise in cost of funds and will continue to reprice in FY24. For fixed book loans, it said no rate transmission on account of rise in repo rate.
“Thus, banks have only one portion of the loan book, i.e. MCLR, which will get repricing benefits. Moreover, with CASA to continue under pressure due to high rate differential with term deposits and money market instruments and repricing of cost of funds, we expect margins to contract in FY24," Ambit Capital added.
Meanwhile, on the valuations front, Nair said that the public sector lenders are very cheap and sees the possibility of an uptrend in their price-to-book value. He expects value buying in PSU banks in the short term, but prefers private lenders in the long term due their stability.
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