Banks’ Q3 FY24 earnings: Top five things to watch out for

Consumer credit attracted a risk weight of 100 percent, which was revised to 125 percent. This, experts said, could slow down the growth of the unsecured loan portfolio of banks.

After robust profits, as earnings for the banking sector kick off in the middle of January, experts say that asset quality, net interest margins (NIM), unsecured loans, deposit and credit growth, and write-offs are going to be some of the crucial elements to watch out for.

Below is a detailed break-up of each of these heads.

Asset quality

Experts say that the asset quality of banks is expected to improve. In a webinar on September 14, ratings agency ICRA said that asset quality is expected to improve further in FY2023-24 due to low slippage (bad loans) and write-offs. “We are expecting banks’ gross non-performing assets (GNPA) and net NPA to improve to around 2.8-3.0 percent and 0.8-0.9 percent, respectively,” ICRA said.

Also read: Banks may face pressure on interest margins as growth momentum in credit, deposits continues

Brokerage house Sharekhan, in a report dated January 5, 2024, also said that the asset quality of banks is expected to remain stable with modest slippages, along with higher recoveries and upgrades. “We expect credit costs to remain flat sequentially for most banks as the portfolio appears to be holding up well across product lines. Additionally, the restructured loan book is expected to see fewer slippages hereon,” the report added.

Net interest margin

Similar to the quarter gone by (June-September FY23-24), banks are expected to see some pressure on their NIMs largely due to the likelihood of a jump in deposit rates.

“Given that raising deposit rates has been an imperative for banks, we believe that this will translate into some correction in the net interest margins (NIMs). Overall, NIMs could be impacted by about 10-20 basis points (bps),” said Subha Sri Narayanan, Director, CRISIL Ratings Limited.

Similarly, Aashay Choksey, Vice President and Sector Head, Financial Sector Ratings, ICRA, said: “Tight liquidity conditions would persist amid reasonably strong credit growth. Accordingly, short-term deposit rates would, in all likelihood, harden from the current levels. Consequently, we see greater pressure on NIMs.”

Unsecured loan portfolio

On November 16, 2023, the Reserve Bank of India (RBI) increased the risk weight on the consumer credit exposure of commercial banks and non-banking finance companies (NBFCs) by 25 percent. Consumer credit includes personal loans, but excludes housing loans, education loans, vehicle loans, and loans secured by gold and gold jewellery.

Also read: RBI increases risk weight by 25% on consumer credit exposure of banks, NBFCs

Consumer credit attracted a risk weight of 100 percent, which was revised to 125 percent. This, experts said, could slow down the growth of the unsecured loan portfolio of banks.

“We are not very worried currently about the recent growth in unsecured retail credit because the portfolio is small. Though it is possible that bank credit growth might slow down a bit hereon, we believe that the probability of an asset quality problem emerging is low,” Sharekhan’s report said.

Deposit and credit growth

In their early business updates for the quarter, some banks reported double-digit deposit and credit growth. For example, HDFC Bank’s advances grew 62.4 percent and its deposits increased 27.7 percent; IndusInd Bank’s advances rose 20 percent and its deposits grew 13 percent; the Central Bank of India reported a 15 percent growth in advances and 10 percent in deposits; Bank of Maharashtra reported a 20 percent rise in advances and 18 percent growth in deposits.

Experts said that despite strong growth, banks need to mobilise incremental deposits by raising rates.

“Banks may need to mobilise incremental deposits by raising rates. This would naturally have a bearing on the cost of funds and lending margins,” Choksey said.

On credit growth, Narayanan said that bank credit is expected to grow at 13-13.5 percent in FY23-24, and further improve to 14 percent in FY24-25 as private capex picks up.

“While the current credit growth is lower than the robust 15.9 percent growth seen in fiscal 2023 off the lower base of the preceding two years, the growth momentum is still healthy,” Narayanan added.

Write-offs

Also read: Top banks increase loan write-offs in September quarter

The latest RBI data showed that banks have recovered a total of Rs 10.16 lakh crore of bad loans over the last nine financial years.

In the July-September FY23-24 quarter, some top banks increased their write-offs. For instance, ICICI Bank’s loan write-off rose to Rs 1,922 crore from Rs 1,103 crore a year ago. Axis Bank wrote off Rs 2,671 crore compared to Rs 1,700 crore in the year prior.

Among state-run banks, Punjab National Bank wrote-off Rs 3,665 crore, up from Rs 2,614 crore in the year-ago period, while Canara Bank wrote off Rs 2,889 crore, against Rs 2,798 crore in the corresponding period the previous year.

Banks write off loans when there is no scope of recovering them. Typically, banks need to set aside 100 percent of the written-off loan amount as provisions, which impacts their profitability.