Banks’ margins to shrink but loan growth, lower credit cost to aid PAT
Banks profitability in seen moderating in Q4 FY24 to around 10 per cent y-o-y, on the back of muted NII (net interest income) growth and further shrinking of margins.
Margins are expected to shrink 3-12 bps on quarter due to increase in banks’ cost of funds, decline in credit to deposit ratio, and back-book deposit re-pricing, according to analysts.
“Deposit growth has picked-up to 13.5 per cent yoy due to RBI’s nudge on higher systemic LDR. However, such growth has come on the back of high-cost retail and bulk deposits, which coupled with some moderation in LDR and unsecured loan growth, could put pressure on margins in Q4,” Emkay Global Financial said in a note.
Sequentially, the profitability is seen improving to about 17 per cent due to lower opex for state-owned banks, AIF relief for private sector lenders, and treasury gains owing to softening gilt yields.
HDFC Bank will kickstart the Q4 earnings season for banks on April 20. ICICI Bank, Axis Bank, IndusInd Bank and RBL Bank are the favourite among private banks.
Kotak Mahindra Bank is seen weighed down by management transition in the near-to-medium term. For HDFC Bank, a sharp reduction in LRD is seen weighing on margins, which coupled with higher opex could off-set the positive impact from the sale of HDFC Credila stake. Indian Bank, Punjab National Bank and State Bank of India are the top picks among PSU banks.
Credit, NII growth
“Pre-result updates suggest broad-based sequential traction in credit, which has so far been strong, driven by services and retail segment. Outlook on credit growth will be important as liquidity gets tighter, and on RBI’s action on unsecured retail loan and loan to NBFCs,” Phillip Capital said.
Provisional Q4 numbers reflect strong business momentum for private banks with sequential loan growth of 3-5 per cent and deposit growth of 5.7-6.7 per cent. Public banks’ sequential loan growth was 3-4 per cent whereas deposits grew 4-5 per cent. Overall, system loan growth is seen at over 15-16 per cent y-o-y and 4 per cent q-o-q, and deposit growth at 5.3 per cent.
There has been some moderation in retail credit, especially credit cards and personal loans, partly due to seasonal factors and the regulatory increase in risk weights, Emkay Global said, adding that some temperance is also seen in vehicle finance and gold loans.
NII is seen growing 4.4 per cent on year and 1.8-2.8 per cent on quarter. Within this, private banks’ NII is seen up 7.2 per cent y-o-y and 3.2 per cent q-o-q whereas for PSU banks is seen 0.9 per cent higher y-o-y and 2.1 per cent q-o-q.
Asset quality
Led by contained slippages, accelerated write-offs and strong provisioning buffers, gross NPA ratios of banks are seen moderating to around 2.0-2.7 per cent from 2.9 per cent in the previous quarter. The net NPA ratio is seen declining to around 0.5 per cent, analysts said.
“Banks are likely to witness yet another strong quarter in terms of asset quality; however, we remain vigilant of any pockets of stress in the unsecured portfolios. Slippages should remain under control and asset quality improvement will continue, driven by healthy recoveries. Credit costs are likely to remain at normalised level,” Axis Securities said in a pre-earnings note.
Phillip Capital expects credit cost to be at 40 bps in Q4 compared with 44 bps in Q3 and 1.1 per cent in the year ago period, and Prabhudas Lilladher expects the gross slippage ratio to decline 9 bps q-o-q to 1.15 per cent, as large banks had witnessed increase in agriculture slippages in Q3 FY24.